Memory lane
A read out of the 19th Party Congress 5 years ago
I did this readout 5 years ago for World Bank management. Interesting to see what I got right (and what not!). I deleted the World Bank internal stuff, which is now outdated because of the different direction the World Bank took since then….
The 19th Party Congress: A Readout
The 19th National Congress of the Communist Party of China took place October 18-24 2017. The highlight of the congress was Secretary General Xi Jinping’s report,[1] which reviewed the achievements of the Party in the past 5 years and announced major new policies for the decades ahead. A new line-up of people in the Central Committee, the Politburo and its Standing Committee was also presented. Below are some highlights and observations on the implications for China and the World Bank.
Policies
The Party Congress amended the Party Constitution to include, among others, Xi Jinping’s Thought of Socialist with Chinese Characteristics for a new Era. This elevates Xi Jinping to the same level as Mao Zedong and Deng Xiaoping. The fact that this happened while still in office puts him at the same level as Mao, whose Socialism with Chinese Characteristics was included in the same constitution in the 1940s. Deng Xiaoping’s Theory was included after his death in 1997. Jiang Zemin’s “Three represents” and Hu Jintao’s “scientific approach to development” are also included in the constitution, but without name attribution. Barring any major upheaval, this makes Xi’s position unassailable, and promises a position of power for him throughout his lifetime, irrespective of his formal positions—a primus without pares as one observer said. Numerous universities have opened a Center for Xi Jinping Thought following the 19th Party Congress.
A further major policy change was the formulation of a new “principal contradiction” (major challenge) between unbalanced and inadequate development and the people’s ever-growing needs for a better life. A change in this principal contradiction happened last in 1981, when class struggle was replaced by Deng’s contradiction “between the ever-growing material and cultural needs of the people and backward social productivity.” Although the thought of unbalanced development has been used for at least a decade, and was captured in Wen Jiaobao’s 2008 “Four Uns” speech (he described the economy as “unstable, unbalanced, uncoordinated, and unsustainable”) and the “Ecological Civilization” had already entered the Party constitution during the 18th Party Congress. Elevation of this theme to principal contradiction means that more emphasis will be placed on non-economic factors of development. Themes such as “Ecological Civilization” and “Beautiful countryside” have started to appear in the local press more frequently.
Rather than economic growth alone, Xi’s speech promises a broader development concept, the “Chinese Dream of Rejuvenation of the Chinese Nation”, and promises not just prosperity, but also national security, technological leadership, an expansion of social programs, balanced regional development, patriotism and ethnic unity. The moderately prosperous society in an all-round manner (a goal introduced by Jiang Zemin in 2002), which is understood to mean high income level and elimination of poverty, will on current trends be achieved by 2020 or thereabout. The continued emphasis on poverty alleviation and the considerable resources put in from all levels of government virtually guarantees achievement of the goals, though sustainability beyond 2020 remains an open question. Realizing the China Dream is to be in 2 phases: Phase 1 until 2035 is to realize “socialist modernization,” which has become a major theme of the policy debate here in China. China wants to be a “great modern socialist country” and a “global leader” by 2050. See the annex for the critical excerpt from the speech on the New Era.
According to Xi’s speech, realizing the China Dream requires reforms in the economic sphere that are quite familiar from the 3rd, 4th and 5th plenum of the 18th Central Committee. These reform should shift the economy from rapid development to high quality development, through fostering new drivers of growth, supply-side structural reforms, innovation, rural revitalization, and coordinated regional development (Yangtze River Economic Belt, Jing-Jin-Ji, Xiongan New Area), improving the socialist market economy by improving property rights, ensuring market-based allocation of production factors, fair competition, increased access for private investment to services, a better intergovernmental fiscal system and more budget transparency, and continued opening up.
Noteworthy is that Xi called for “improving total factor productivity” which is not an everyday call that state leaders make anywhere in the world. This may be attributed to the fact that some of our DRC colleagues with whom we are preparing the new Drivers of Growth study were on the drafting committee for Xi’s speech.
Also noteworthy is the emphasis on State Capital rather than State Enterprises. The term, introduced in the 3rd Plenum of the 18th Central Committee in 2018 implies that, at least in theory, State Enterprises are to make returns rather than serve as an ideological basis. The tension between on the one hand the decisive role of the market in allocation of production factors and a continued strong role of State Capital and national champions remains unresolved, though. The new direction in SOE reforms is “mixed ownership” which implies that private shareholders can obtain a non-controlling share in SOEs, which would in the authorities’ view lead to better governance and higher performance. Shortly after the 19th Party Congress, internet giants Alibaba and JD made an investment in China Unicom.
In a short passage of his speech, Xi promised continued further opening up, emphasized the Belt and Road Initiative, which was also included in the Party Constitution, and promises more access for foreign companies. “All businesses registered in China will be treated equally.” Though this was said before, and many foreign companies complain that this is rather aspirational, the institutional framework for making this a reality is coming into place. The “negative list” system that distinguishes sectors in which foreign enterprises cannot invest or hold no majority, will be implemented nationwide. Together with this negative list, a “positive list” of state functions was issued, the first of its kind, which would further limit local discretion.
Recent State Council regulations further limit local governments’ discretion in providing enterprise support, while granting enterprises the right to raise complaints with the competition authorities in case they feel put ad a competitive disadvantage. How this plays out in practice remains to be seen, but the policy (recommended in the NDG summary) and the mechanism for enforcement is promising. Absent from the report is any mention of the RMB and capital account opening.
On international development, Xi’s speech echoed the themes from his Davos and Belt and Road Forum speeches. China strives for “a new type of international relations” for “building a community with a shared future for mankind.” Major country diplomacy (basically China’s relationships with key players such as the US) would be used to build a stable world. The Belt and Road Initiative will play a key role in international cooperation. China also pledged to increase assistance to other countries, in particular least developed countries, share knowledge through South-South cooperation, support the United Nations (exclusively mentioned) and support efforts of other developing countries to increase representation and voice in international affairs.
One excerpt from the speech particularly signifies a departure from the past in China’s international ambition:
“It means that the path, the theory, the system, and the culture of socialism with Chinese characteristics have kept developing, blazing a new trail for other developing countries to achieve modernization. It offers a new option for other countries and nations who want to speed up their development while preserving their independence; and it offers Chinese wisdom and a Chinese approach to solving the problems facing mankind.”
To my knowledge for the first time does a Chinese leader presents China’s model as a path to follow for other countries.
Policies on people’s wellbeing include all the social sectors, such as education, Healthy China, employment, and a stronger social security system. Xi’s report announces the government will “quickly bring pension schemes under national unified management,” which would be important for future labor mobility and something we argued in China Urban. The section also includes a passage on housing, which should be for “living in, not speculation.” There is a repeat of the commitment to eradicate poverty by 2020, and the report announces a “social governance model,” which alludes to party leadership in all aspects in life.
On ecological civilization and building a beautiful China the report reaffirms commitments on emission reductions and promises to engage on global environmental governance. Green development, including green finance, solving of prominent environmental problems, including air, water and soil pollution and enhancing assessment of environmental performance in local officials’ evaluation and better environmental regulation and enforcement should all contribute to a socialist ecological civilization.
As is usual in these type of speeches, Xi’s report largely focuses on broad objectives and outlines of policies. Specifics will be revealed over time, through regulations, laws and State Council policies. A first glimpse of what the New Era means for economic policy was revealed in the sparse reports on Central Economic Work Conference, December 18-21. In that conference, major targets and economic policies were set for the coming year—but the limited information thus far prevents us from drawing conclusions as to what extent the 19th Congress is influencing practical policies.
Party
Throughout, Xi’s report emphasizes on improving governance, society and government institutions, and leadership of the Party. The speech was larded with several classic Party references, including the “4 Cardinal Principles.”[2] Rule-based governance is a major theme, but this is, as usual, to take place under the guidance of the party. A new National Supervision Commission is to consolidate national supervisory organs, including the China Central Disciplinary Inspection, the Party’s powerful anti-corruption commission. A Supervision law, a draft of which has been released, is to provide legal basis for the commission. The draft includes sections that suggests broader application of a form of shuangui, the detention without judicial process used by the Party to fight corruption and discipline infringements.
Party building receives considerable attention in Xi’s speech: 9 pages out of 65 in the English text. Xi Pledges a decisive victory against corruption, build capacity and competency in the Party, train Party members in Socialism for a new Era, and increase inner Party democracy. The latter received a set-back in the election of the 19th Party Congress leadership elections: whereas in 2012 and 2007 a straw poll among the delegates senior members influenced the choice of central committee, Politburo and standing committee of the Politburo, this year’s selection reverted to the informal “consultation of about 50 senior members” according to Xinhua. The straw poll system, news agency Xinhua said, was exploited by disgraced senior officials who engaged in “vote-soliciting corruption,” including Sun Zhengcai, former party secretary of Chongqing and once seen as a potential leader-in-waiting. Mr. Sun now faces criminal charges after being expelled from the Party in late September for alleged graft, indolence and other wrongdoing.
People
The new 7 member Standing Committee of the Political bureau of the Party was presented at the end of the 19th Party Congress. The key surprise was perhaps that there was no obvious successor for Xi Jinping appointed. All of the current members of the Politburo are too old to be able to serve two terms after Xi’s scheduled retirement in 2022. Though this triggered much speculation on whether Xi would seek a third term or more, this may simply have been the result of the recent removal of Sun Zhengcai, once seen as successor to Xi (see Annex II for the lineup, along with an indication of their likely role in government,[3] which will be confirmed by the March 2018 National People’s Congress).
Absent from the new line-up is Wang Qishan, the 69 year old close confident of Xi and former head of the Central Disciplinary Inspection. Many had speculated that he would stay on, and with it break the (informal) retirement rule that no person be appointed beyond the age of 67. Though now retired from his party function, he could still be appointed in a government role and some have speculated he may become Vice President. In any case, he is most likely to remain an important advisor to Xi and a powerful figure in the Party.
As we expected, Li Keqiang has retained his position on the standing committee and will retain his position of Premier.
An interesting appointment is that of Wang Huning, who has been a strong Party ideologue for 3 decades, and among others coined the phrases “Three represents” (for Jiang Zemin), the “scientific theory of development” (Hu Jintao) and the China Dream (Xi Jinping). Wang, former director of the leading group for comprehensive deepening of reforms, and earlier in his career a professor of international relations at Fudan University is known for his strong Confucian-statist views on the economy and society.
Han Zheng, the former party Secretary of Shanghai, is seen to be a reformist—he took the lead on the special trade zone in Shanghai, which, though only mildly successful, tested some of the reforms that are now being mainstreamed. Because of his former post, he is also seen as a person that can get things done, and would therefore make a strong executive vice premier, perhaps overshadowing Li Keqiang. Somewhat unusual, he has spent his entire career in Shanghai, without tours in the poorer, often more challenging provinces in China.
The 25-member Politburo includes several members that had been tipped for a place in the Standing Committee (https://www.brookings.edu/interactives/chinas-new-politburo-standing-committee/). These include Chen Min’er, Party Secretary of Chongqing and Hu Chunhua, Party Secretary of Guangdong, the only two young enough to be able to fulfill two terms in higher office, and therefore seen as the two most likely to be elevated to the Presidency and the Premiership (and the Standing Committee) at some stage.
A promising elevation to the Politburo is that of Liu He. Liu is generally seen a s a reformer, is an old friend of the World Bank, and is tipped to become a vice premier in charge of the economic portfolio.
Implications
The 19th Party Congress will likely be seen by history as a watershed in China’s policy directions. The “Socialism with Chinese Characteristics for a New Era” will be the guide for the Party for decades to come—possibly at par with Deng Xiaoping’s Reform and Opening up of 1978. Xi’s speech presents a confident China with high domestic and international ambitions. I believe that the 19th Party Congress also confirms that China is very comfortable with its model of development—and sees it as a model for others. “Feeling the stones to cross the river” was always read in the west as a gradual move towards a market economy (and democracy some would add). China’s success, including its success in weathering the storm of the global financial crisis, and the failure of many western democracies to handle the crisis well, has meant a loss of credibility of the western model in the eyes of China. They have reached the other side of the river, but it is not the West.
This comes at a time when the US, per words of Richard Haas, has “abdicated” its international leadership. For China this may have come earlier than expected, and no doubt it was comfortable in a G-2 world in which the US still took the lead. Nevertheless, it seems to take on the mantle of global leader with ease and eagerness, witness Xi Jinping’s Davos speech, the Belt and Road Summit in May and now the 19th Party Congress. “Bide your time, hide your capabilities,” Deng Xiaoping’s 1990 words that guided China’s international diplomacy and geopolitics, is a thing of the past.[4] As noted, for the first time, Xi’s speech presents China’s path as an alternative for other developing countries that seek rapid development, and China is eager to work with other countries to make them follow suit.
China’s growing international ambition is not uncontroversial. Indeed, world leaders need followers and according to the latest Pew research, even in China’s backyard, trust in China’s leadership remains low.[5] So the question remains whether China has the cloud to pull off a global leadership role, even in the absence of US leadership. In some countries, the growing role is increasingly seen as an issue. In particular, in the United States, despite a cordial and successful visit of President Trump to China, resistance is increasing. The 2017 US National Security Strategy reflects the growing conviction that China is a rising strategic competitor and that its economic policies, domestically and abroad, are helping it to achieve strategic interests.[6] The US has initiated stronger ties with countries such as India in what it now calls the “Indo-Pacific.” The US has also actively used its CFUS rules to stop Chinese investments in the US. In light of recent rhetoric from the White House, more trade measures against China can be expected, and, more worrisome, the US seems ready to take on the WTO, which it considers as ineffective in containing China. The EU has recently issued a document that is laying the basis for continuing to treat China as a non-market economy,[7] which would make it easier to impose countervailing tariffs on China’s exports, and regulations similar to the CFUS, which makes Foreign Investment subject to security review, and possibly blockage. France already has such regulation in place, and Germany recently reinforced its policies in this respect.
As far as economic development goes, these actions can only be detrimental to China. China still has a lot to catch up, and is therefore a major beneficiary of open world markets, can learn more advanced technologies through FDI, and can catch up faster if it can acquire critical IP for its development. We will discuss some of this in the New Drivers of Growth report, and suggest that China would need to reach out to create the international environment in which two types of systems can work together. Other stakeholders like the EU and the US would have to create the space for China to engage in such a conversation, though, and up to now there seems little appetite for that: China just needs to play by “the rules” remains the theme.
Annex I: The New Era:
Based on a comprehensive analysis of the international and domestic environments and the conditions for China’s development, we have drawn up a two-stage development plan for the period from 2020 to the middle of this century.
In the first stage from 2020 to 2035, we will build on the foundation created by the moderately prosperous society with a further 15 years of hard work to see that socialist modernization is basically realized. The vision is that by the end of this stage, the following goals will have been met:
· China’s economic and technological strength has increased significantly. China has become a global leader in innovation.
· The rights of the people to participate and to develop as equals are adequately protected. The rule of law for the country, the government, and society is basically in place. Institutions in all fields are further improved; the modernization of China’s system and capacity for governance is basically achieved.
· Social etiquette and civility are significantly enhanced. China’s cultural soft power has grown much stronger; Chinese culture has greater appeal.
· People are leading more comfortable lives, and the size of the middle-income group has grown considerably. Disparities in urban-rural development, in development between regions, and in living standards are significantly reduced; equitable access to basic public services is basically ensured; and solid progress has been made toward prosperity for everyone.
· A modern social governance system has basically taken shape, and society is full of vitality, harmonious, and orderly.
· There is a fundamental improvement in the environment; the goal of building a Beautiful China is basically attained.
In the second stage from 2035 to the middle of the 21st century, we will,
building on having basically achieved modernization, work hard for a further 15
years and develop China into a great modern socialist country that is prosperous,
strong, democratic, culturally advanced, harmonious, and beautiful. By the end of
this stage, the following goals will have been met:
· New heights are reached in every dimension of material, political, cultural and ethical, social, and ecological advancement.
· Modernization of China’s system and capacity for governance is achieved.
· China has become a global leader in terms of composite national strength and international influence.
· Common prosperity for everyone is basically achieved.
· The Chinese people enjoy happier, safer, and healthier lives.
· The Chinese nation will become a proud and active member of the community of nations.
[1] Titled: “Secure a Decisive Victory in Building a Moderately Prosperous Society in All Respects and Strive for the Great Success of Socialism with Chinese Characteristics for a New Era”
[2] The Four Cardinal Principles, introduced by Deng Xiaoping at the onset of reforms, are: keeping to the path of socialism, upholding the people’s democratic dictatorship, upholding the leadership of the Communist Party of China, and upholding Marxism-Leninism and Mao Zedong Thought.
·
[3] This is based on the order in which the Standing Committee line-up was presented to the press after the congress—which is strictly
[4] Deng’s “24 character strategy” emerged in the aftermath of Tiananmen and the Fall of the Berlin Wall. In full it reads: “Observe calmly; secure our position; cope with affairs calmly; hide our capacities and bide our time; be good at maintaining a low profile; and never claim leadership.”
[5] http://www.pewresearch.org/fact-tank/2017/10/16/how-people-in-asia-pacific-view-china/?utm_content=bufferc8525&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer
[6] https://www.whitehouse.gov/wp-content/uploads/2017/12/NSS-Final-12-18-2017-0905.pdf
[7] On significant Distortions in the Economy of the People’s Republic of China for the Purposes of Trade Defense Investigations http://trade.ec.europa.eu/doclib/docs/2017/december/tradoc_156474.pdf