kjennerud (2012-11-07) china's political system and new leadership

China’s political system and new

leadership Macro Focus, November 7 2012

Analyst Ole André Kjennerud

Outline

• How is the political system organized?

• How large is the Party?

• What happens this week?

• What do we know about the new leaders?

• How is economic policy expected to change?

• Potential challenges for the Party?

• Communism or capitalism?

Background and some facts

• Full name is People’s Republic of China.

Short form: China.

• In Mandarin Zhongguo – “The Middle

Empire”

• Communist state, comprising 23 provinces

(incl. Taiwan) (sheng), 5 autonomous

regions (zizhiqu) and 4 municipalities (shi)

• Current Chief of State: President Hu

Jintao (Vice President Xi Jinping)

• Current Head of Government: Premier

Wen Jiabao (Vice Premier Li Keqiang)

• Cabinet: State Council which is appointed

by National People’s Congress

• The Congress is with its roughly 3000

members, the world’s largest.

• The Communist Party (CCP) is also the

world’s largest party, with 80 mn members.

• President and Vice-President elected by

the NPC for a five-year period. Last

election was held on 15-17 March 2008.

Structure of the political leadership

Chinese Power Structure

PRC Government

National Administrative Structure

Legislative

State Council (WEN)

Functional center of state power

Overseen by NPC but decision have de facto force of law

Headed by Premier Wen Jiabao, which is appointed by NPC

NPC Standing Committee (WU)

Headed by Chairman Wu Bangguo

About 160 members

National People’s Congress (NPC)

Legislative body

Meets 2 weeks every year

About 3000 members

Executive

President (HU)

Elected by the NPC

5 year term, maximum 2 terms

Military (HU) Chinese Communist Party

(CCP)

Executive

General Secretary (HU)

Highest ranking official

De facto leader of PRC

General Secretariat (XI)

Permanent bureaucracy of the CPC

Manages the work of the politburo and its Standing Committee

Legislative

Politburo Standing Committee

Top leadership of the CPC, most powerful decision making body in the PRC

Recently 7-9 members

Politburo

About 25 leaders.

Leaders of the CPC

Central Committee

Appoints the most powerful people in the CPC

About 370 members

National Party Congress

About 2000 delegates

Held every 5 years

In practice, decisions are pre-made

Three decades of leaders

summed up

2nd Generation: Deng Xiaoping

1978-92

• Greater market reform and economic privatization

• Continuing to crackdown on political dissent

3rd Generation: Jiang Zemin

1993-2002

• Broadened the power base of the CCP by recruiting entrepreneurs and other new socio-economic players (a formulation known as the “three represents”)

• Falun Gong

4th Generation: Hu Jintao

2003-12

• Creating a “harmonious society” sought to reduce economic disparities and social tensions

• Tightening censorship over the media and police control in society

Power Triangle

PRC Government

Legislative

State Council

NPC Standing Committee

National People’s Congress

Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


From one-man leader to collective

leadership

• Whereas Mao and Deng was known as strong and superior leaders, Jiang Zemin and Hu Jintao has to a larger extent been characterized as “first among equals” in their respective third and fourth generations of PRC leadership.

• According to Chen Li at Brookings Institute, the Chinese Communist Party leadership is now structured around what can be called “one party, two coalitions” where the two balance each other’s power.

• The Elitist Coalition emerged under Jiang Zemin’s era, currently led by Wu Bangguo, chairman of the legislature.

• The Populist Coalition is led by Hu Jintao

• Incoming leaders Xi Jinping and Li Keqiang belong to the elitist and the populist coalition, respectively.

The Elitist

Coalition

Princelings - leaders who come from high-ranking official family backgrounds The Shanghai gang

Emphasize on economic efficiency and GDP growth

Dominates the economic sectors, representing the coastal region’s interests

The Populist Coalition

Former Chinese Communist Youth League officials

Stands for social justice and social cohesion

Prevails in party organizations, claiming to voice concerns of the inland region

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


High turnover rate • The turnover rate of the CPC Central

Committee (i.e. share of new members) has averaged at 62 percent over the past 25 years due to several rules, constraining cadres opportunity to stay in power for too long:

- Officials aged 68 or older must retire from the Politburo and other top Party positions

- Newly appointed members of the Politburo also need to be younger than 62

- All the top officials are limited to two five-year terms.

- “Law of Avoidance”: Party secretaries, police chiefs etc. are often non-local. Among the 31 provinces/municipalities, only 2 party secretaries (Jiang in Shandong and Zhao in Shaanxi) work in the provinces in which they were born.

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


“Democracy” in the Central

Committee

• The CPC has adopted some election methods to choose the

members of the Central Committee and other high-ranking

leaders.

• Since the 13th National Congress of the CPC in 1987, the

Chinese authorities have adopted a method of multi-candidate

election known as a “more candidates than seats election” (cha’e

xuanju) for the election of Central Committee members.

- For example, if the top leaders plan to have a 350-member Central

Committee, they may place 370 names on the ballot. The 20

candidates who receive the fewest votes in the ballot are eliminated.

- According to Chen (2012), the delegates of the Party Congresses have

often used this limited mechanism of “intra-Party democracy” to block

some candidates favored by top leaders or princelings.

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


The 18th Party Congress

What happens this week? • The Congress – the Party’s 18th – begins on

November 8 but the new leadership team will probably be presented about a week later.

• Different event from the National People’s Congress (NPC) which will meet in March next year to elect the country’s new President.

• Even so, the role of the NPC is largely to rubber stamp the decisions taken at the Party Congress next week, where Xi Jinping will get the nod as the new General Secretary.

• This position gives Xi leading rank on the Politburo’s Standing Committee, China’s most senior decision-making body.

• There is a little more speculation as to whether Xi can also expect a promotion to the chairmanship of the Party’s Central Military Commission, in effect making him commander- in-chief of the Chinese military too (in the last leadership transition this was delayed for two years, with the outgoing boss Jiang Zemin retaining this crucial role).

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


The current men of power

• The Politburo Standing Committee is the highest body of the Central Committee, which is the highest authority within CCP.

• The Standing Committee currently consists of these 9 members:

Hu Jintao.

General Secretary. Head of Politburo Standing Committee (President of PRC). Chairman of the Central Military Commission

Wu Bangguo. Secretary of NPC. Chairman of the NPC Standing Committee

Xi Jinping. Head of General Secretariat. Vice-President of PRC

Wen Jiabao. Secretary of NPC. Premier of the State Council of the NPC.

Li Keqiang. Deputy Secretary of the State Council of the NPC. Vice Premier of the State Council of the NPC.

Jia Qinglin. Secretary of NPC. Chairman of the NPC Political Consultive Conference

He Guoqiang. Secretary of the Central Commission for Discipline Inspection

Li Changchun. Secretary of NPC.

Zhou Yongkang. Secretary of the Central Political and Legislative Committee

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


More educated and more

diversified

• Big contrast between China’s leaders at the start of the reform period, and the present. Younger, more educated and more diversified background.

• The new leaders may usher economic reforms, as the problems in China’s current economic model are now understood, potential policy solutions have already been researched and identified.

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


From 9 to 7? • Some have speculated that the Politburo Standing Committee will be reduced from 9 to 7 members.

Expected to have a positive effect on the effectiveness of policy changes, as “fewer will be responsible for more”.

• Who will fill up the empty positions? Members will be elected so that the balance between the two factions is maintained. Chen Li’s view on some of the contenders:

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


Who should we look out for? • Wang Qishan

- Good reputation abroad. Has previously been in charge for negotiations between China and the US Treasury.

- Also known as “Chief of the fire brigade” for his work on Chinese banks in the late 90’s (“the fundamental principle of a market economy is that the winners win and the losers lose”); SARS in Beijing in 2003 (on errors counting dead: “one is one and two is two”).

- Made vice-premier in 2008 in the State Council. Oversaw the government’s response during the financial crisis in 2008-09.

• Li Yuanchao

- Perceived to back political reform, on the basis of his record as Party Chief in Jiangsu Province and currently as head of the Party’s Organization Department.

- According to Capital Economics, it will probably be seen as a set-back for reform efforts – both economic and political – if Li does not reach the Standing Committee.

• Wang Yang

- Guangdong Party Secretary Wang is seen as a political reformer for his light touch in response to social unrest in the province. Liberal.

Power Triangle

PRC Government

Legislative

State Council



Executive

President

Military CCP

Executive

General Secretary

General Secretariat

Legislative

Politburo Standing

Committee

Politburo

Central Committee


When can we expect new economic policies?

But policy shouldn’t change too much

• The most recent indications of economic policy has indicated a gradual shift towards a more liberal FX and interest rate policy.

• The new leaders are likely to continue on that path. Speculation on if and how much they will speed up changes.

2

4

6

8

2008 2009 2010 2011 2012

China: Benchmark lending and deposit rates with allowed limits

Lending DepositSouirce: Thomson Datastream/DNB Markets

-1.2

-0.9

-0.6

-0.3

0.0

0.3

0.6

0.9

1.2

Apr-12 Jun-12 Aug-12 Oct-12

USDCNY - deviation in % from PBoC's daily fix (closing spot vs. fix)

Source: Thomson Reuters/DNB Markets

Less “how to create growth” and more “what type

of growth to create”

• Likely to abstain from “chasing growth”, and instead maintain housing market controls.

33

37

41

45

49

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Balancing risks: Investments in % of GDP

Source: Thomson Datastream/DNB Markets

Decreasing risk of decliningaggregate demand

Increasing risk of capital misallocation

Political challenges

Getting richer, but also more unequal • Within one or two generations, China has been transformed from one of the

world’s most equitable countries in terms of income distribution to one of the least.

• But i): Most have probably become better off with China lifting 500 mn people out of poverty from 1981 to 2004 ("a rising sea lifts even the smallest boat").

• But ii) more inequality creates tensions, unrest and instability, and affects the possibilities to shift demand to consumption

25

30

35

40

45

1981 1989 1997 2005

China: Gini coefficient

Source: World Bank/DNB Markets

0

10

20

30

40

50

60

70

80

90

China India Brazil LIC MIC

Poverty headcount ratioAt $2 a day (PPP) in percent of population

2008-10 1990Source: World Bank/DNB Markets


Not getting any younger

10.0 5.0 0.0 5.0 10.0

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

85-89

95-99

China: Population distribution 1970

WomenMen

Source:: UN Population Dividsion/DNB Markets

6.0 4.0 2.0 0.0 2.0 4.0 6.0

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

85-89

95-99


Women Men


6.0 4.0 2.0 0.0 2.0 4.0 6.0

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

80+

85-89

95-99


Women Men


• China’s one-child policy which was introduced in 1978 has been one of the most effective birth-control measures introduced by any government in history.

• In 1970 China’s fertility rate was close to 6. In 1980 it had dropped to 2.7, and by 1995 it had fallen below 2.

• Simultaneously, the death rates declined, making China’s population significantly older. From having a typical “young” population in 1970, China is now moving towards the “Japanese scenario”.


Who will support the growing group of old? • The UN’s projections of China’s demographics, the dependency ratio is

expected to increase from less than 20% today to 40% in 2050.

• In a low-fertility scenario, the ratio may increase to almost 100% by 2080.

0

20

40

60

80

100

120

1950 2000 2050 2100

China: Dependency ratioPopulation aged 65+ in percent of population aged 20-64 years

Historic Low fertility Medium fertility High fertility



How has the Party retained its power? • Nathan (2003) outlined four important

institutional developments in the Chinese political system:

1. The increasingly norm-bound nature of its succession politics (e.g. term limits)

2. The increase in meritocratic, as opposed to factional, considerations in the promotion of political elites

3. The differentiation and functional specialization of institutions within the regime

4. The establishment of institutions for political participation that strengthen the CCP’s legitimacy among the public at large

• But also significant: From 1980 to 1990, GDP was quadrupled. In 2003, GDP was again quadrupled, and given the current forecasts, the same is about to happen in 2012.

0

2

4

6

8

10

12

1981 1991 2001 2011

China: GDP (ppp) in USD trillion

Source: Thomson Datastream/DNB Markets

Deng Era (1978 - 92) Hu Era (2003 - present)Jiang Era (1993 - 2003)

Commmunism vs. capitalism

A source of conflict? “We are the Communist Party, and we will define what communism is”.

Chen Yuan, China Development Bank

• After the Tiananmen incidence in 1989, the Party moved back on reforms. Private companies became hunted. But on Deng Xiaoping’s Southern Tour in 1992, the path again changed towards market reforms and economic liberalization. Jiang Zemin followed up on Deng’s stands by deregulating large sectors and joining WTO in 2001.

• In 2001 Jiang allowed entrepreneurs to officially join the Party. According to McGregor (2008), Jiang and Deng’s though was that “the Party had much in common with private entrepreneurs, who disliked democratic politics and independent unions as much as they did. (…). Even by the standards of a capitalist economy, the Party could be unusually pro-business, as long as the state got a cut along the way”.

• But still, many sectors are fully controlled by the state, such as oil, petrochemicals, mining, banks, insurance, telecom, steel, aluminum, electricity, airports, railways, ports, highways, autos, health care and education.

• The new leadership’s main challenge will be to remove monopolies in important sectors, and continue to deregulate and de-link state and company.

Summary

• A key characteristic of the Party is pragmatism.

"It doesn't matter whether a cat is white or black, as long as it catches mice."

Deng Xiaoping

• No matter who will be elected for the politburo standing committee, it will be a priority for the party to project an image of seamless control and stability.

• A key to the political dynamism and how the Party can avoid the trap of other communist states (one-party states) is to maintain the balance between the two factions within the party and the increasingly norm-based (s)election system of new top leaders.

• To the extend we can expect major policy changes, they should be expected first in late 2013, when the 3rd session of the CCP is held.

Sources • Cheng, Li 2012. “The End of the CCP’s Resilient Authoritarianism? A

Tripartite Assessment of Shifting Power in China,” The China Quarterly, 211, September 2012, pp. 595–623

• Cheng, Li 2012. “Understanding Xi Jinping and China's New Generation of Leaders”. NBR, February 2012

• Cheng, Li 2012. “The Power Shift in China”. Yale Global, April 2012

• Kennedy, Scott 2012. “China Policy Watch: Leadership Transition - The Chance For Change”. Gavekal Dragonomics, June 2012.

• McGregor, Richard 2010. “The Party: The Secret World of China’s Communist Rulers”. Harper Collins Publishers Inc., 2010.

• Nathan, Allison 2012. “Top of Mind - Demystifying the China Handover”. Goldman Sachs, November 2012

• Nathan, Andrew J. 2003. “Authoritarian resilience,” Journal of Democracy 14 (1), 6–17.

• Williams, Mark and Qinwei Wang, 2012. “China Watch – Who will lead China?”. Capital Economics, October 2012.

• In addition: Articles published by the Financial Times, Reuters, and Bloomberg.

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kjennerud (2012-11-07) china's political system and new leadership

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