- Unlike many observers, we do not expect this month’s closely-watched five yearly Party Congress to usher in major economic policy shifts. Cementing China’s existing (political and economic) system and stability remain key policy objectives and are not compatible with the bold, potentially disruptive, reforms and a more aggressive reining in of credit growth that others appear to foresee.
- President Xi Jinping will deliver a key policy document that is likely to focus on state-owned enterprise (SOE) reform and reducing capacity; deleveraging; financial reform; new urbanization; innovation, moving up the value chain and “Made in China 2025”, One Belt, One Road, and the environment. But actual policy implementation will be heavily influenced by political economy factors.
- In all, we expect a somewhat lower GDP growth target for next year; a focus on curbing financial risks and leverage in parts of the financial system but further solid credit growth; and gradual financial sector reform. We also predict some addition SOE reform, in part encouraged by a push to reduce pollution. But we expect the nature and pace of SOE reform to remain shaped by objectives such as creating (inter)national champions and disagreements on speed.
There are signs of a lack of consensus at senior level about issues like SOE reform and closing unviable companies. We expect reforms to continue, gradually, but see little appetite for steps that are economically or politically risky
At the 19th National Congress of the Communist Party of China, which starts on October 18, President Xi Jinping is expected to tighten his grip on power by having allies promoted to senior party and government positions. His keynote policy speech on the first day will set out the leadership’s priorities for the next five years.
So what is Xi’s likely vision for the world’s second-largest economy? In this Research Briefing, we outline our expectations for the economic policy priorities that will be unveiled and how we think they will actually affect policy implementation after the Congress.
What is on the National Congress agenda?
The National Congress, with its 2,300 delegates, will probably last about a week and will kick off a new five-year cycle. The gathering will approve several policy documents, including the key one to be delivered by Xi on the first day.
High level policy documents matter more in China than in many other countries. They are the result of months of negotiations and form the basis of policymaking by a vast government apparatus.
The recent experience shows how important these documents really are. The 18th Congress report, presented by Hu Jintao, Xi’s predecessor, in November 2012, focused on:
- the doubling of GDP and per capita income between 2010 and 2020
- “accelerating the change of the economic growth model…and …developing and expanding the service sector”
- “promoting strategic emerging industries and advanced manufacturing industries”; financial reform
- “greater emphasis on sustainable development and environmental protection” and “combatting corruption and promoting political integrity”
These have formed the policy backbone over the last five years.
At this point, the key questions around the 19th National Congress are: What will Xi’s keynote speech focus on? What will the actual impact on the economy be?
To start with the first question, in line with historical practice, the focus will be influenced by that of the documents of the third plenum (the November 2013 “reform blueprint”), the 13th Five Year Plan and recent policy documents such as that of the recent Financial Work Conference.
Thus, Xi’s report will likely confirm long-term objectives, notably a “moderately prosperous” society and a doubling of GDP between 2010 and 2020.
In terms of economic policy and reforms, we think the focus will be on:
- the anti-corruption campaign
- state-owned enterprises reform and reducing capacity
- financial reform
- "new urbanization"
- moving up the value chain and the “Made in China 2025” campaign
- One Belt One Road
- globalization and the environment
In line with recent trends and policy statements, overall credit growth will slow only modestly, pointing to further increases in leverage, and thus in financial risk, in the coming years
Why we don’t expect a sizeable policy shift
Some observers expect major policy changes after the so-called plenum, anticipating a greater willingness for bold reform and a more forceful reining in of credit growth.
We don’t share these views. We think that such expectations are based on a misinterpretation of the leadership’s views. It is true that, as stressed in policy documents such as the “reform blue print”, China’s leadership is interested in market-oriented reform in several areas of the economy.
But according to the same documents, including the November 2013 one, the ultimate objective of reform is to strengthen the existing “Socialism with Chinese characteristics”. This includes, notably, “a dominant role for public ownership”, and adherence by all key actors, including SOEs, to (Communist) Party leadership. That is important context when thinking about the shape of likely economic reform in China.
Moreover, Xi Jinping has increasingly stressed the importance of “stability” on all fronts. Bold, potentially disruptive economic reform and forceful deleveraging are not consistent with stability. Also, there are signs of a lack of consensus at senior level about issues like SOE reform and closing unviable companies.
In all, we expect reforms to continue, gradually, but see little appetite for steps that are economically or politically risky.
Actual impact on economic policy
Taking into account the leadership’s priorities and the political economy of reforms, we expect more progress in some areas than in others.
Areas where we expect swift progress include innovation, “Made in China 2025” and moving up the value chain, One Belt, One Road, and reducing pollution and environmental degradation.
Areas where we think the political economy will continue to imply slower progress are:
- Reform of state-owned enterprises
- Fiscal reforms (changes in the inter-governmental fiscal system)
A somewhat lower GDP growth target for 2018 than this year’s, with the leadership probably accepting growth falling somewhat below 6.5% in 2018. We forecast 6.2%.
Continued focus on reining in financial risk and reducing leverage in parts of the financial system, notably by tighter regulation and supervision, in line with the outcomes of July’s Financial Work Conference.
But, also in line with recent trends and policy statements, overall credit growth will slow only modestly, pointing to further increases in leverage, and thus in financial risk, in the coming years.
No rapid financial reforms. The Financial Work Conference reconfirmed the objectives of opening up financial markets, capital-account liberalization and RMB internationalization. However, it emphasized the need for a gradual approach and “appropriate sequencing”, thereby confirming our outlook of no significant reform on exchange rate flexibility and/or capital-account opening in the near future.
Reform of state-owned enterprises (SOEs) to gather some pace, notably by means of changes in shareholding structures and M&A, as well as by measures to improve “operational efficiency”.
Moreover, a stronger push to reduce pollution is likely to accelerate cuts to capacity and production in heavy industry, where many problem firms are state-owned. Environmental protection has become a priority in large part because of heightened awareness and concerns among the public.
The government wants to see progress even if that means economic costs.
However, progress towards higher efficiency and profitability of SOEs will remain constrained by a lack of consensus on how fast to close inviable companies and objectives such as creating national and international champions and strengthening the role of the Communist Party in SOEs.
The powerful Standing Committee currently has seven members, five of whom will be replaced, because of (unwritten) rules that members have to retire when they reach the age of 68
Further progress on “new urbanization” - enabling migrants to live and spend like normal urban citizens – which requires urban residency and access to public services in urban areas. The government has targets for granting urban residency, rebuilding “run down” areas and migration. The 13th
Five Year Plan targets an urbanization rate of 60%, up from 55% in 2015, with 45% of the total population registered as permanent urban residents.
However, the “new” urbanization can only work well if reforms take place in the intergovernmental fiscal system to enable local governments to provide public services to the newly urbanized migrants. While some steps are being made, progress on this front is likely to remain slow.
In all, after the 19th National Congress economic policy is likely to remain characterized more by stability, rather than accelerated change and reform.
So what happens after the 19th National Congress?
According to protocol, immediately after the National Congress, during the first so-called plenum, the new Central Committee of the Communist Party of China (comprising around 370 people), is scheduled to endorse the composition of the new Standing Committee of the Political Bureau, the highest organ in the party.
The Standing Committee currently has seven members (that number will probably not change), and five of them will be replaced, because of (unwritten) rules that members have to retire when they reach the age of 68 (the Political Bureau itself has 25 members).
The first plenum will be followed by a period of discussions on reshuffling other senior positions, especially at the provincial and local government level. These appointments will be made during the second plenum, typically held in February, before being approved by the National People’s Congress at its meeting in March next year.
The annual policy cycle implies active work on policy formulation from November until early March, including a Central Economic Work Conference in the first half of December, where some of the major outlines for economic policy for the next year are set.
The procedures call for a third plenum, likely in October 2018, to discuss more concretely major policy issues and economic reforms over the coming years. The fifth plenum, held two years before the next National Congress, i.e. in 2020, is also important as it will discuss the scope and direction of the next 14th Five Year Plan.
About the Author
Louis Kuijs is Head of Asia Economics at Oxford Economics. Copyright © 2017 Oxford Economics. All rights reserved.