- In this piece, we provide a Q&A answering five key questions about the 19th National Congress of the Communist Party that starts on 18 October.
- A key focus will be whether President Xi Jinping strengthens his power even more by putting mainly his ‘own’ people into the Standing Committee of the Politburo – the top leadership of China.
- Another key focus will be what happens on the other side of the Congress on economic reforms. Will implementation get a new push? Or will it continue to lag, with the risk of China running into severe problems down the road?
- We are cautiously optimistic that Xi Jinping will find a middle road and not strengthen his power so much that it creates a backlash at a later stage. We also see a good chance that reform implementation moves up the agenda next year following his first term in which Xi has focused on politics and his power base.
- Nevertheless, continued focus on deleveraging and the cooling of the housing market is set to lead to a slowdown in China over the next year. However, what happens after that depends a lot on how China moves on reform and financial risks.
What to watch for – and when?
- The Congress runs from 18 October for one week.
- On the first day, the President will present the Work Report. It will take stock of China’s achievements and outline policy for the coming years.
- On the day after the Congress ends (typically after a week), the Central Committee will have its 1st Plenum. The Standing Committee of the Politburo will be presented afterwards.
A few facts on Chinese politics
- Since 1992, the Chinese leader has been in office for two terms, each of five years.
- The leader is appointed at the Party Congress and typically has more leading positions. Xi Jinping is both General Secretary of the Party, President and Chairman of the Central Military Commission (CMC).
- Xi Jinping was appointed president in 2012 following the two five-year terms of Hu Jintao in the period 2002-2012. Before that Jiang Zemin was President from 1992- 2002. He took over from Deng Xiaoping who was China’s leader (although not President) 1979-1992. Deng Xiaoping launched the reform and opening up policy that paved the way for China’s rise.
- It is the norm that the next president is designated at the Party Congress five years in advance.
- Since 2002 the Party has had an informal rule that a person cannot continue in the Standing Committee of the Politburo if the person has turned 68.
- Since Mao, it has been the norm that leadership is ‘collective’ representing different factions rather than decided by one faction – or person – only. This was a counter-reaction to Mao’s dominance in power.
#1: The 19th Congress – what is it?
Since 1982 The National Congress of the Communist Party has taken place every five years. The year of the Congress is the ‘election year’ in China as the top leadership of China – the Standing Committee of the Politburo – is appointed at the end of the Congress. The Standing Committee typically consists of 5-9 members and currently has seven members including the President Xi Jinping and the Premier Li Kegiang.
The Politburo consisting of 25 members (including the Standing Committee members) is a part of the Central Committee that currently consists of around 375 full and alternating members. The total number of delegates at the Congress is roughly 2,200.
While the Standing Committee is officially appointed at the Congress, the decision is in reality taken in advance by the top leadership – and sometimes previous leaders.
#2: Why is it important?
1. Reform implementation or not? One reason the Congress is important is that the people appointed for the Standing Committee will say a lot about where the political and economic winds are blowing in China. Will the leadership include liberals and reformers? Or is it less reform-friendly people. At the Third Plenum of the Central Committee in 2013 that followed the 18th Congress in 2012, Xi Jinping put reforms very high on the agenda. However, implementation has lagged a lot since then. One of the key questions after the 19th Congress will be whether reform implementation gets a new push because Xi Jinping feels more secure after setting his ‘own team’ to work over the next five years. Whether we see such a push could prove crucial for China’s future path as supply side reforms are increasingly important as part of dealing with misallocation of credit and avoiding the so-called ‘middle income trap’ in which many countries have experienced stagnation after a rapid period of growth to middle income levels.
2. More power to Xi? The Congress is also important because it will say a lot about whether Xi Jinping will strengthen his political power even further. Since he became president five years ago Xi has spent much focus on reviving a party that he saw as threatened from the inside by widespread corruption and eroding discipline. He launched a corruption and frugality campaign that has been much fiercer than any previous campaign, with removal of people at all levels. Most noteworthy was the life sentence to Politburo member Bo Xilai in 2012 for corruption. But as late as July this year the Party Secretary of Chongqing and Politburo member Sun Zhengcai was removed on allegations of corruption and last week he was expelled from the party. He was a candidate even mentioned for the top two leadership when Xi’s term ends in 2022.
Xi has also centralised decisions to a great extent and put himself at the head of the table in a long list of Leading Small Groups in the Party that are removing power from the Government (State Council) to the Party. In addition, he focused on reforming the military and state security during his term. And he has tightened control with media and strengthened the role of the Party in the corporate sector. Last year Xi was named ‘core leader’ of the Party in a further strengthening of his power leading up to this year’s Party Congress. Xi is widely believed to be the most powerful leader since Deng Xiaopeng who was China’s leader from 1979-1992.
#3: What are the key things to watch?
In order to evaluate the above points several key things will be watched at the Congress:
What number of people in the Standing Committee?
At the moment the Standing Committee has seven members, but before that during the last term of Hu Jintao it had nine members. If the size of the Standing Committee is shrunk even further, it will be seen as a sign of Xi taking more power. If smaller, it would most likely consist of mainly his own supporters. A bigger Committee will give more room for including people belonging to other factions of the party.
Who is appointed?
If Xi mainly puts his ‘own’ people in the Standing Committee, it’s clearly another tightening of his grip on power – and a further move away from the tradition of ‘collective leadership’. Whether he chooses reformers could be a sign of how high economic reforms will be prioritised next year. Another uncertainty has related to whether Xi Jinping will replace Li Keqiang as Premier, as he has been seen as a ‘weak’ Premier and might be blamed for the economic problems. But the most recent expectation among China watchers is that Xi will keep him on so as not to stir things too much.
Will the ‘7 up, 8 down’ rule be respected?
Another issue is whether Xi will respect the informal rule ‘7 up, 8 down’. This rule has been in place at the past three National Party Congresses (since 2002), but was not used prior to that. If Xi respects the informal rule then all five members apart from Xi himself and the premier Li Kegiang will be replaced. However, last year a senior party official Deng Maosheng cast doubt over this when he referred to it as ‘folklore’ and added that the ‘party makes adjustments according to the circumstances’. Since then a lot of speculation has taken place whether Xi Jinping would keep Wang Qishan who heads the Central Commission for Discipline Inspection and is leading the fight on corruption. Wang Qishan is widely seen as China’s de facto number two leader and acting as Xi’s right hand. But aged 69 he is supposed to step down if the informal rules are followed. Lately the winds among commentators have blown in the direction that Wang Qishan will not stay on and he also said recently it was soon time for him to step down. We will know by end-October.
Will Xi Jinping designate a successor?
It is also a norm that a successor for the current President is designated at the Congress after the sitting President’s first term. Both Hu Jintao and Xi Jinping were elevated to the Standing Committee as vice-presidents in the term ahead of their presidencies and it was clear they would take over after that term. If this is repeated then we should look for this to happen again. It will have to be a person aged 57 or younger in order to serve five years in the Standing Committee before serving two five-year terms as President.
However, it has been speculated that Xi may not designate a successor now. Either he may wait to have more to time to find his successor. Or he may try to go for a third term. This would require a change of the State Constitution, though. Another scenario mentioned has been what’s called a ‘Putin-Medvedev’ model in which Xi steps down as President after 2022 but stays in the Standing Committee while choosing a President that will follow his orders.
What will Xi put into the Constitution?
It is normal for Presidents to add ‘thoughts’ and ‘theories’ to the Constitution in connection with the Party Congress. On 18 September Chinese news agency Xinhua reported that amendments to the Constitution would include ‘the key theories and strategic thoughts’ so as to ‘fully represent the latest sinicization of Marxism’. A key question is whether Xi’s name will be included in the amendments. Only Mao and Deng Xiapeng have been attached to the political philosophy so far. Neither Jiang Zemin or Hu Jintao added their names. Clearly if Xi’s name is added it will be another demonstration of power. The most recent rumours suggest that this will be the case. If so, it would put him next to leaders like Mao Zedong and Deng Xiapoing, while neither Jiang Zemin or Hu Jintao has their name in the Constitution. A further strengthening would be if Xi reintroduces the word ‘Chairman’ of the Communist party to replace the title ‘General Secretary’. The term ‘Chairman’ was removed in 1982 at the first Party Congress after Deng Xiaopeng came to power and was replaced by the term ‘General Secretary’ to signal a removal of the absolute power that Chairman Mao had taken.
What will the Work Report say?
At the first session the President will hold a speech and present the Work Report outlining what has been achieved and guidelines of future policy. Since Xi Jinping has already been in power for five years it will likely not be big changes compared to current policy. How much reforms are stressed compared to previous occasions may give a signal of where policy is going. However, the problem with reforms has not been that the policy is not there but more that it has not been followed up by implementation.
#4: Will it lead to any changes in economic policy?
The focus of the Congress is mainly politics. But we may get some clues on whether we see any adjustments on economic policy possibly stressing financial risks and need for reform. In reality, though, we will not really find out until next year to see if reform implementation is getting a higher priority.
Overall, we should expect continuity when it comes to economic policy. However, we are cautiously optimistic that Xi after having secured a stronger power base will have more energy to put more weight behind the reform agenda. Much of his first term has focused on ‘cleaning up’ the party from corruption, securing control over the army and to some extent also taking a lead role in China going global and adopting a stronger position in global governance. Xi Jinping is by a long way the Chinese leader who has visited the most countries. But his legacy will be much determined by whether he succeeds in implementing the reform agenda he laid out at the 3rd Plenum of the Central Committee in 2013, which caused a lot of optimism – an optimism that has later faded significantly as reforms have been missing and the state has taken stronger control in many areas.
Should Xi fail to carry through the reform agenda his goal of making China a moderately prosperous society by 2020 will be difficult. A lack of supply side reforms will continue the misallocation of credit and most likely lead to significant debt losses and crisis at some point down the road.
#5: Will it matter for financial markets?
The Congress as such is not likely to have a big impact on markets. If anything, it could be positive for risk sentiment if at the Congress we get a clearer signal on the need for reforms. But the markets may be sceptical after the disappointment following the 3rd Plenum, which was strong on words but lacked implementation.
Regardless of the Congress, we do expect the Chinese economy to slow down. Cooling the housing market and dealing with financial risks have moved to the core of economic policy. We look for a continuation of these policies to increasingly weigh on Chinese activity over the next year. Hence, over the next year we expect China to be a moderate drag on global growth, be a disinflationary force and give less support to commodity markets.
In the long term, though, the Congress will be more important for financial markets, as whether China over the next five years is able to deal with financial challenges and carry through supply side reform will be crucial, not just for China but for the global economy.
