Even With Unrivaled Power, Xi Seen Wary to Push China Reform
Even with undisputed power, Xi is seen wary to push reforms in China.
(Bloomberg) -- President Xi Jinping is expected to emerge from the twice-a-decade Chinese Communist Party’s congress that starts Wednesday as the most powerful figure in Chinese politics since Mao Zedong. Far less certain is what he’ll do with all that enhanced political clout.
Global investors and executives hoping an emboldened Xi will tackle the big structural challenges facing China--from sprawling and inefficient state-owned companies to a massive corporate debt overhang--may be disappointed, according to analysts.
“The most likely scenario is a continuation of what we had in the last five years,” said Frank Benzimra, head of Asian equity strategy at Societe Generale.
Playing it safe makes political sense for Xi at a time when the economy is delivering positive surprises -- growth has beat estimates for three consecutive quarters -- and the international environment features saber rattling over North Korea’s nuclear program. But by delaying reforms to avoid short-term hiccups, Xi could also miss an opportunity to put the world’s second-biggest economy on a more stable long-term footing.
Markets will be listening when Xi addresses more than 2,000 delegates in Beijing to kick off the conclave. Among the existing priorities he’ll likely spotlight are the One Belt One Road campaign to promote infrastructure projects with trading partners in Asia and Europe and plans to spend 2 trillion yuan ($300 billion) building a new city near Beijing.
“We believe the overall policy direction will inevitably lean towards the more cautious and conservative side,” economists Kevin Lai and Olivia Xia of Daiwa Capital Markets Hong Kong wrote in a report published last month. “The reform agenda could ultimately give way to the continuous quest for stability, and hence more control is more likely than more liberalization.”
Underlining how the economy has stabilized, a gauge of manufacturing in China rose to a five-year high in September, while data released Monday showed factory prices gained a more-than-expected 6.9 percent last month. Industries that stand to benefit from increased government support include health care, semiconductors and telecommunications equipment, according to Societe Generale’s Benzimra.
Comments from People’s Bank of China Governor Zhou Xiaochuan that economic growth could rise to 7 percent helped drive up yields on Chinese bonds Tuesday, said Wu Sijie, senior trader at China Merchants Bank. The 10-year yield rose 3 basis points to 3.74 percent, the highest since April 2015 on a closing basis, taking its two-day advance to 6 basis points.
Zhou’s comments suggest China’s economy will continue its strong performance into the final quarter of the year, Wu said.
Xi may also emphasize the strategic importance of reforming state-run companies, with the government taking steps to create globally competitive multinationals in strategically important industries like telecommunications, energy, financial services, said Fan Cheuk Wan, head of Asia investment strategy and advisory at HSBC Private Banking.
However, bigger economic policy issues might also need to wait for other meetings later this year and next year, including a gathering of the Party’s Central Committee known as the Third Party Plenum, according to Hyde Chen, an equity analyst with UBS Wealth Management. He expects Xi to stick with current policies designed to support so-called “new economy” sectors and address environmental problems across the country.
“For the big reform policies, such as financial reform and SOE reform, they will be announced in the third plenum, which will be held in November next year,” he said. “That’s more critical.”
At the most recent Party Congress in 2012, Xi’s predecessor Hu Jintao outlined ambitious goals like doubling per capita income between 2010 and 2020, targets that have formed the basis of economic policy in the years since, according to Louis Kuijs, head of Asia economics for Oxford Economics.
Xi will likely focus on well-known priorities of his such as the anti-corruption campaign, the One Belt One Road initiative and Made in China 2025, a plan to promote manufacturing innovation, Kuijs wrote in a report published Oct. 3. Xi is unlikely to make significant moves to promote speedy reform of struggling state-owned enterprises or financial markets.
“In all, we expect reforms to continue, gradually, but see little appetite for steps that are economically or politically risky,” he wrote.
Also potentially affecting Xi’s appetite for bolder changes are the notable missteps of his first term. A surprise devaluation of the yuan in 2015 roiled markets worldwide and helped fuel record capital outflows. Shanghai’s stock market today is about two-thirds of its mid-2015 highs and China’s foreign exchange reserves in September were $3.1 trillion, down from a peak of nearly $4 trillion in 2014. Economic growth decelerated from 7.9 percent in 2012, when Xi took the party’s top job, to 6.7 percent in 2016.
Setbacks during Xi’s first term demonstrated the conflict between reform and stability, according to Bloomberg Intelligence. “An equity market boom and bust and botched exchange-rate reform dented reputation for policy competence,” economists Tom Orlik and Fielding Chen wrote in a report published on October 11. “With policy space reduced, the second five years could be harder than the first.”
--With assistance from Helen Sun and Xize Kang
To contact the reporters on this story: Bruce Einhorn in Hong Kong at beinhorn1@bloomberg.net, Moxy Ying in Hong Kong at yying13@bloomberg.net, Emma Dai in Hong Kong at edai8@bloomberg.net.
To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net, Brian Bremner, John Liu