MNI POLICY: China’s New Leaders Face Challenges in Reform Push

President Xi Jinping’s recruitment of loyalists to head China’s new generation of leaders could deliver faster policy making, but they face domestic and external challenges in pushing the reforms needed to carry out the Party’s “dual circulation” strategy that will accelerate once new heads of the central bank and financial regulators take office in March, MNI understands.

After Sunday’s unveiling of China’s new Politburo Standing Committee, the focus turns to March’s National People’s Congress where it is expected that Li Qiang will be officially appointed Premier, a role that will see him spearhead the delivery of key reforms including industrial modernisation, wealth redistribution and increased financial markets access. New heads of the People’s Bank of China and the China Banking and Insurance Regulatory Commission will be appointed by March.

Loyalty was repeatedly mentioned as the common trait among those selected by Xi to work at the apex of Chinese political power by sources contacted by MNI.

“The complete loyalty to the top leader, or the high trust of the leader in his new team, will make policy implementation more effective, faster and bolder based on the decision of the top leader,” one source said.

However, that loyalty was viewed as a doubled-edged sword as it may result in an absence of balance, which “could easily cause an overshoot if all policy makers rush in same direction, and then they would pay a heavy cost to correct it if the direction is wrong,” the source said. (See MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans)

ANOTHER PREMIER LI

The 63-year-old Li Qiang, who is likely to replace current premier Li Keqiang, was a former mayor of Shanghai City and governor of Zhejiang province. He is a reformist with an “open-minded and market-oriented” style, said an advisor who requested anonymity.

“He is the best choice from the current members of the Politburo to be Premier to couple the two circulations,” they said, referring to China’s plans to boost domestic demand and enhance its exports position as part of its dual circulation strategy.

The adviser pointed to Li's experience heading regions in the Yangtze River Delta Economic Zone, which is a driver of China’s domestic growth and international trade. Li flagged a pragmatic and market-oriented approach to reform in Zhejiang province in two interviews with Caixin magazine in 2013 and 2014. He spoke highly of entrepreneurship and pledged to be “the first one to eat crabs” - or dare to be bold - as long as the direction was in line with the “spirit of the central government” and “people’s willingness”.

“He is capable of doing the job as long as the overall direction is right,” the advisor said.

TOUGH FUTURE

Li and the new leadership team confront challenges from sluggish domestic demand and rising external risks as countries look to decouple from China.

Both industrialization and urbanization, the two engines that have powered China’s expansion, are losing steam. The former has been curbed by the slow pace of industrial modernization, while the latter has faltered due to high housing price, another advisor said.

The risk of decoupling from western nations is rising as the country pursues its “own characteristics” and remains resolved to “the absolute leadership of the Party”.

“China needs to reshape its industrial chain by setting up high-quality manufacturing featuring hi-tech and finding a way out for traditional export-oriented industries,” the advisor said, adding that “every reform would be a ‘hard bone’ now.”

President Xi stressed four key points underpinning financial sector growth in his Oct 16 speech: financial system reform, enhanced capital markets functioning, improved financial service in rural area, and yuan internationalisation.

“The financial sector is not satisfactory, and it would be a focus for future reform,” the advisor said.

The reform agenda will fall on new officials once PBOC governor Yi Gang and its Party head Guo Shuqing step down. Yin Yong, deputy Party secretary of Beijing city and former vice governor of the PBOC, is a possible candidate to replacing Yi Gang. Yi Huiman, chairman of China Securities Regulatory Commission, may replace Guo next March, sources predicted.