What Wall Street gets wrong about Xi Jinping's new money men
China’s new lineup of top economic policy makers is about to take the stage. The view that they offer nothing more than a lurch to the left is too simplistic.
China is about to see its biggest reshuffle in decades as a generation of internationally respected economic officials makes way for a clutch of politicians better known for strong ties with President Xi Jinping than academic credentials or overseas exposure.
That prospect is ratcheting up anxiety from Wall Street and Washington to the UK and Japan, with concerns the new lineup will prove to be Xi yes-men who take China further toward state intervention and international isolation — away from the path set by a dynasty of pro-market officials that have called the shots since Deng Xiaoping first opened the door between China and the world.
But there's an alternative take.
Whisper it quietly, but perhaps trust from the top, experience toughing it out in China's fierce political system and a pragmatic approach to policymaking are more important than rigid adherence to the economics textbook. If that's the case, the new team may turn out to be better placed than their predecessors to push through the painful reforms China now needs.
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The changing of the guard gives added significance to this year's National People's Congress, which starts in Beijing on March 5. That's where the GDP growth target for China's $18 trillion economy will be set, likely at about 5% or even higher; the budget inked, probably aiming for a slight reduction in the fiscal deficit; and Xi has hinted a shake up of government agencies is in the works.
New projections by Bloomberg Economics show that if Xi's new cadres push through the right mix of reforms to raise worker productivity, steady trade and technology ties with the US, and offset the effects of a rapidly aging population, China could clock annual growth out to 2030 averaging not far from 5%.
But if they fail to deliver on those key areas, backtrack on market liberalization and mishandle the property crisis, growth could slump closer to 2% a year, leaving the US firmly in pole position as the world's biggest economy.
As US-China tensions grow, it's easy to see why many Western observers are pessimistic about the incoming line up.
Bowing out at this year's NPC is Premier Li Keqiang, who has a separate power base from Xi and as a student won China's top prize in economics. His likely replacement is Xi's former chief of staff, Li Qiang, who translated his old boss's Covid Zero instructions into the strict Shanghai lockdown that contributed to last year's growth slump.
Vice Premier Liu He — a Harvard graduate who in 2013 made an agenda-setting call for the market to play the "decisive" role in China's economy — is headed back from the policy front lines. He is expected to be replaced by He Lifeng, who has known Xi for more than four decades, rose from local government to run China's state planning agency and has more limited international experience.
And central bank governor Yi Gang, a renowned "scholar official" who taught economics in the US, is reportedly set to be replaced by Zhu Hexin, a veteran banker with less extensive academic credentials. In addition to the vice-premiership, He Lifeng is being considered for the role of Communist party secretary at the bank, the Wall Street Journal reported.
China followed a path of market liberalization and global engagement from Deng Xiaoping's open-door policy in 1978 through to Zhu Rongji's reform of state enterprises in the late 1990s and entry into the World Trade Organization in 2001.
In the downbeat view, the rot started to set in after the global financial crisis of 2007-8. Beijing's confidence in the free market model was undermined and a massive stimulus tipped the economy further toward dependence on lending from state banks.
From 2013, in this telling, Xi confirmed the lurch left. Signature initiatives like "Made in China 2025" — tasking state planners with seizing control of crucial technologies — and the "common prosperity" drive that sparked a crackdown on entrepreneurs like Alibaba's Jack Ma saw the state playing a larger role in the economy.
Suppression of protestors in Hong Kong, human rights abuses in Xinjiang and a strategic partnership with Russia unveiled on the eve of the Ukraine invasion hardened the bleak assessment from the US and its allies.
In the last year, pessimism about China's prospects triggered an exodus of foreign investors. That deepened initially following the October party congress, where Xi won a third term and installed his associates in key positions.
But then something turned. Stocks began to rebound on the view that the unified team might prove effective. In January, after Covid restrictions were lifted, support for the troubled property sector amplified, and the crackdown on entrepreneurs eased, they shot higher.
That market reversal — first betting that Xi allies sweeping the leadership positions would be bad for growth then judging it as a positive — speaks to the shortcomings of black and white readings of China's leadership.
History is not so straightforward. Deng Xiaoping — lionized as the champion of China's liberalization — introduced the one-child policy, a major intrusion into family life that's now adding a demographic drag to growth. Zhu Rongji — second only to Deng in the reformers' pantheon — closed thousands of small state firms, but also aimed to create a roster of state champions to compete with global rivals.
The private sector has by many measures flourished under Xi. When he came to power in 2012, private sector firms accounted for just 10% of the market value of the nation's top listed companies. By 2022, that number had risen to over 40% — though analysis by the Peterson Institute finds the share edging down at the end of the period.
On Xi's watch, China has slashed restrictions on foreign direct investment and opened the door wider to cross-border holdings of stocks and bonds. Western banks have a larger presence than ever. Foreign auto firms are no longer forced into joint ventures with domestic rivals. Indeed, on Li Qiang's watch as party secretary of Shanghai Tesla built a factory there.
There's still more to do. Allowing private sector companies to thrive and compete on more even terms with state rivals and rebuilding trade and investment with advanced economies will be key to raising productivity, and essential to hitting Bloomberg Economics upside scenario of annual growth in the years ahead sustained not too far from 5%.
There are pockets of optimism that the incoming batch of policymakers will continue to take China down an outward-looking and market-driven path.
A recent Citigroup report identified three "arrows" of Li Qiang economics: Developing the private economy, opening up and attracting FDI, and promoting industrial upgrading. The Citi analysts said that judged on his work in the provinces of Zhejiang, Jiangsu and Shanghai, Li's policy style appears pro-business, relatively liberal and pragmatic.
Dichotomies like market-versus-state and engagement-versus-isolation aren't the right frame when policy change is less about overcoming the resistance of state enterprises than winning over millions of ordinary citizens.
That's what will be needed to raise the retirement age and to further growth-boosting urbanization.
China's biggest growth challenge is that its working-age population is shrinking. The labor force is set to drop to 550 million in 2050, from a peak of close to 770 million in 2016. Pushing back the pension age to offset that drag is as important for Xi's new leadership team as it is unpopular with China's workers.
Hundreds of millions of migrant workers and rural dwellers still face barriers to where they can live, a pool of potential to be unlocked if more make a permanent home in the city, gaining skills and finding more productive jobs. But for many, the appeal of the big city is fading as living costs rise — a trend Xi's new team will need to reverse by raising taxes on high earners to fund improvements in education and healthcare.
Policy shifts are often driven by circumstance rather than ideology. Xi started his first term with a full-throated commitment to market reform, only to be confronted with a series of crises — from a stock market crash and capital flight in 2015 to the trade war with the US in 2018 — that put reform on ice.
The appeal of the US as a model to emulate has also faded in Beijing's eyes. In China, the zombie apocalypse smash The Last of Us has been rechristened The Last Days of the USA.
In the end, perhaps the most important thing about the Xi's new team isn't whether they lean pro-market or pro-state, but rather whether he feels able to give them the space to deliver solutions to complex problems — and whether they have the grit to get things done. Since Xi's started his third term in October, there are signs that pro-growth pragmatism is in the ascendency once more.
Covid Zero controls, the biggest drag on China's growth and closely associated with Xi himself, have been lifted. Liu He used an appearance at the World Economic Forum to trumpet renewed support for entrepreneurs. A senior official visited Alibaba. And a Xi-Biden meeting in Bali attempted to raise the temperature of bilateral relations above freezing, even if the spy balloon saga has dashed hopes for rapid progress.
For 2023, Bloomberg Economics forecasts China's GDP to grow 5.8%, with the end of Covid lockdowns providing a one-off boost. Even with the smartest policy mix, the inertial weight of high debt and dismal demographics is too great for that pace to be sustained. With some good decisions, Xi's new team can avoid too sharp a slide.
— With assistance by Adrian Leung
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.
