Xi Jinping set to overhaul China’s economic policy team at watershed congress

Xi Jinping, China’s most powerful leader since Mao Zedong, is preparing to use the upcoming parliamentary session to rubber-stamp the launch of a “strong” government by appointing his most trusted aides to oversee finance, technology and other sectors.

The annual National People’s Congress, which begins on Sunday, will replace Premier Li Keqiang, the head of government, and a team of technocrats who have been credited with steering the economy through the turmoil of the past five years. Important portfolios such as the financial sector can also be restructured.

Xi promised at a meeting on Tuesday that the party plans “far-reaching” changes that, apart from reforming the financial sector, will include closer control of the technology and science sectors and – perhaps most dangerous for business – increased party involvement in ” non-public company”.

The changes come at a sensitive time for China’s economy, which was beset by Xi’s zero-Covid strategy last year and regulatory violations in the technology and property sectors that hurt business sentiment. Gross domestic product in 2022 will grow by only 3 percent, lower than the official target of 5.5 percent.

While growth is expected to rebound this year – manufacturing activity grew at its fastest pace in a decade last month – the new team will have to convince skeptical investors that China is reopening business in earnest and is ready to tackle long-standing structural problems, including rising . government debt, reducing population and lagging productivity.

“The main priority of the congress is to determine the path for growth in the short term and try to convince domestic and foreign investors that there is a path for long-term sustainable growth,” said Victor Shih, professor of Chinese politics. in economics at the University of California, San Diego.

In October, Xi carried out a clean sweep of the seven-member Politburo Standing Committee, stacking the Chinese Communist Party’s top decision-making body with loyalists at the party’s quinquennial congress.

Xi was also confirmed as party secretary and military chief for a third five-year term, a precedent-shattering move that was made in 2018 when the NPC changed its constitution to eliminate the two-term limit. This month, parliament will complete the formality of re-electing Xi as president.

He is expected to outline the CCP’s leadership reshuffle at the top echelons of government, which will boast a team of new faces drawn from Xi’s past.

China’s leader is expected to appoint Li Qiang, a former Shanghai party chairman who worked with Xi as governor of Zhejiang province in the 2000s, as prime minister and head of China’s State Council, or cabinet.

The outgoing team is led by economic czar Liu He, a Harvard-trained economist who is widely credited with launching a financial “de-risking” campaign in 2017 to limit the accumulation of shadow banking and debt and prevent a financial crisis.

The government, which warned against flooding the economy with stimulus, could slow – although not stop – the expansion of China’s debt, which has reached 273 percent of GDP from 150 percent before the global financial crisis, according to Gavekal Dragonomics, a research group.

Unlike officials such as He Lifeng, Xi’s protégé who is expected to succeed Liu, he spent much of his career as a local politician. They may be more inclined to respond to political needs at the expense of conservative long-term monetary policy, analysts say.

“Of course, we know the central bank is always a government organ that follows the overall direction of the Communist party. That’s the plan,” said Shih. “But it’s been done by career technocrats for decades.

“By raising the career of local government politicians. . . which can have the effect of putting short-term political goals ahead of medium-term policy goals.

In a further step that will consolidate control through policymaking, the party has discussed a proposal to set up a super committee to monitor the central bank and other financial regulators, two people familiar with the matter said.

If adopted in the NPC, the new entity would be a more powerful party-led version of the existing body, the Financial Stability and Development Committee, which is overseen by the State Council, the people said.

While the existing committee only coordinated financial regulation between bodies, the new committee will be empowered to make quick decisions on cross-sector risks such as the collapse of Evergrande, the property developer with the country’s most debt, the people said.

The top candidates to lead the new body are He and Ding Xuexiang, Xi’s powerful chief of staff. Lu Zhiyuan, party chief in the coastal city of Qingdao, is one of the top candidates for finance minister.

Whatever doubts market watchers have about Xi’s new administration, it will benefit in the near term from the economic rebound triggered by the end of zero-Covid, analysts say.

NPC is expected to set a full-year GDP growth target of 5 to 5.5 percent, said UBS economist Tao Wang, adding that the new government may also try to boost growth by channeling more funds to the property sector or to boost consumption.

“I also see the rise of policies that may be more supportive than expected,” Wang said.

Economists, however, point to the challenge of maintaining higher growth beyond the post-Covid rebound, especially if China is to achieve its goal of becoming a “sufficiently prosperous” society by 2035.

This would require average annual growth of 3.5 percent until 2035 to reach the $20,000 per capita income threshold per year, said Robin Xing, chief China economist at Morgan Stanley.

“It’s more about the next debate beyond this one-off boost,” said Xing.

Achieving sustainable long-term growth will require tough decisions on questions such as how to boost consumption as part of the activity in an economy that still invests too much as a percentage of GDP and how to solve the problem of local government debt, analysts said.

“Maybe we’ll get good growth this year and everyone will be happy,” said Michael Pettis, a finance professor at Peking University. “But it’s only temporary.”