China’s Political Tea Leaves

The 19th Party Congress in China is winding down.  President Xi
was the core leader before the Congress,
and his priorities drove the agenda for the past five years.  
Expectations for a dramatic shift in policy or priorities seem unfounded. 

There is declaratory policy and operational policy, and much of the speeches and analysis have focused on the
What does China say it is going to do?  

There seems to be a consensus that the 19th Party Congress was about
President Xi consolidating power.
seems to have largely been accomplished before the Congress.  Institutional
rivals, like the Communist Youth League, have largely been neutered.  Xi
had already emerged as the third great leader after Mao and Deng
Xiaoping.  Former Australian Prime Minister Rudd, in an op-ed piece in the
Financial Times yesterday suggested that Xi has now eclipsed Deng.  

Be that as it may, one of the important aspects of the 19th Party
Congress is not about policies but about personal.
  In particular, the
issue is who will be on the Standing Committee, the executive arm of the
Politburo’s Central Committee.  This
will be clear tomorrow.  

However, we learned today that Wang Qishan
was not named to the Central Committee.
This is potentially important.  Wang
is 69 years old, and under the informal
rules (eight down, seven up), he was due to retire.  Some observers
suggested that Xi would allow him to stay, which would ostensibly create a
precedent for Xi to stay after this five-year term.  Wang has had a number of posts, but most recently has overseen the crackdown on corruption as the
Head of the Central Commission for Discipline Inspection.  It is still to be seen if Wang, a confidante of President Xi is given another post that allows him to still influence the party.  

Tomorrow the top leaders of the Politburo and its Standing Committee will
be announced.
  The important element here is that given the opaqueness
of Chinese politics, insiders and outsiders are looking for clues into Xi’s successor. 
The successor is picked at the start of
the second five-year term.  Some suspect that Xi is not interested in
picking a successor now, either because he wants a third term or to be strategically flexible.  In Chinese
politics, this would be conveyed very
subtly.  If the other people that join Xi on the Standing Committee were
born before 1960, it would indicate that no successor has been named, given the
age limits.  

On the other hand, rather than have one youngster (born in the
1960s), two came named to the Standing Committee, set the stage for some
competition between them.
  Two candidates that have been suggested are the head of the Communist
Party in Chongqing, Chen Miner, and the Party head from Guangdong, Hu
Chunhua.  The former has worked with Xi, while the latter is an acolyte of
former President Hu.  

There could be another twist to the plot.  Previously, there
were nine seats on the Standing Committee.  Five years ago this was cut to
seven.  Reportedly, there has been a trend toward reducing the size of
leadership bodies.  If this were to continue, it is possible that the
Standing Committee is downsized again to five. 

PBOC Governor Zhou has his indication to step down shortly. 
There is some speculation of his successor.  Three candidates have been suggested who were confirmed on the Central
Committee:  Jiang Chaoliang, who is the Party head from the Hubei
province, and Securities Regulatory Commission Chair Liu Shiyu, and Banking
Regulatory Commission Chair Guo Shuqing.   PBOC Deputy Governor Yi
Gang was named as an alternate member of the Central Committee, which some
suggest is a sign he will succeed Zhou.  

Zhou has often pressed for financial liberalization.  While it
may be idiosyncratic, we suspect that institutionally, the PBOC is aligned with
the forces of change and reform, as opposed to say the Ministry of Commerce,
who may be more allied with the force of
order.  Still, it seems reasonable to expect that the next PBOC Governor
influences the broad strategy and pace.  Zhou recently made it clear that
there is no strong urgency to widen the 2% band that the yuan is allowed to
trade against the dollar relative to the daily reference rate.  The yuan
is allowed to move in a wider band against other major currencies.  

Last week, Zhou warned of a Minsky moment, by which he meant a financial
Given that he was talking at the 19th Party Congress, it
seems clear he was talking about China.  It seemed to be reminding his
listeners of the importance of reforming the financial system.   Many
foreign observers tend to focus on the aggregate debt levels and the excess
capacity in numerous industries.  Most of China’s debt is on corporate
balance sheets, or local government’s special purpose investment vehicles. 
The central government has little outstanding debt. 


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