As the tide goes out on China’s golden era of double-digit growth, structural issues which were largely ignored during the good times now threaten to sink the economy. If China wants to steer a safe-passage through these perilous waters and avoid an economic crash, tough decisions will need to be made. Such decisions, while being in the longer-term interests of the country, might not be deemed in the interests of the party, which ultimately wants to maintain its control over the economy.
The 11.2 trillion-dollar question is whether China’s leaders have the pragmatism and appetite to muster the political will to deliver the sort of reforms China can no longer afford to postpone. The world might shortly get its answer when Party delegates meet in Beijing from 18 October at the quinquennial 19th National Congress of the Communist Party of China. Here they will select new leadership and set policy direction for the next half-decade.
Xi who wields power
To understand the significance of this congress and why its outcome will reverberate for years to come, it is important to understand the nature of Chinese politics. The people who truly rule China are in the Politburo Standing Committee (PSC), the party’s top echelon of power.
Since the era of Deng Xiaoping, following the chaos unleashed by the Cultural Revolution, China has been ruled by consensus decision-making at the top of the party. Factional rivalries, such as those between the Communist Youth League and the Shanghai faction have largely held the balance. However, Xi’s unprecedented campaign to ostensibly tackle rampant corruption within the party has dealt major blows to both of these groups, taking down top officials within them.
With these factions largely defeated, Xi, who belongs to a loosely defined group known as China’s princelings, or Second Generation Red (children of old party leaders), is in a much stronger position to use the Congress to exert absolute control over the party. If he can consolidate power in this manner, he will have a much freer hand to push through his own agenda. What that agenda might entail remains the subject of speculation and conjecture. Debate continues as to whether he will use the political space open to him to push through much needed market reforms, or whether he will double down on ominous signs that he intends to take China down a more conservative, ideologist, statist, illiberal path.
The road to perdition?
Executives need to be aware of the potential scenarios that might subsequently unfold after the congress, and what impact these could have on their businesses. They will need to align their strategic plans with the scenario they see most likely as unfolding, while considering the impact alternative outcomes would have on their contingency planning.
In our report, Beyond the 19th Party Congress, we outline three possible scenarios that have the potential to unfold depending on leaders’ appetite for reforms:
- Delayed reforms: Party gridlock or an unconstrained statist, conservative agenda put forward by a more powerful Xi Jinping delays any substantial reforms being put forward. In this case, the economy would likely crash and subsequently flatline.
- Partial reforms: Xi Jinping is unable to fully consolidate his power, resulting in the need for compromise amongst the party factions, whereby only partial reforms are possible. This scenario involves the continued slowdown of the economy, leading to stagnation.
- Comprehensive reforms: Xi Jinping is able to significantly consolidate his power, providing him with the political space to push through major economic reforms. Initially, there would be turbulence as the economy worked through its excesses, but this would give way to a consumption led recovery.
The significance of this year’s event cannot be understated; what China’s leaders do next will set the stage for the future of China’s development. FSG sees the highest probability for major reforms to occur if Xi Jinping is able to consolidate his power, as many believe that he will, and if he is inclined to enact major reforms. A big if in the latter case as he has so far shown himself to be quite the ideologist conservative. The worst possible outcome for China’s future would be an unconstrained Xi pushing through an untrammeled statist agenda. China’s economy would take a hit as would all MNCs with a stake in it.