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What Xi’s clean sweep means for the economy

  • Xi Jinping has removed the last vestiges of rival factions from the upper echelons of the Party, stacking the Politburo full of loyalists in a clean sweep not seen since the Mao era. With political ties taking increasing precedence over technocratic experience, the quality of policy implementation could decline. And the dismantling of remaining checks and balances will make it harder for the Party to shift course if Xi Jinping’s policy agenda falters.   
  • The Party Congress concluded over the weekend. A revised Party Constitution was announced and the new Central Committee was revealed. The amendments to the Constitution cemented Xi Jinping’s position as the “core” of the Party and further elevated his ideological contributions. But it was the leadership reshuffle that really drove home the extent of Xi’s power.
  • Officials with ties to former General Secretary, Hu Jintao, have all departed the 25-member (now 24-member) Politburo that leads the Party. That’s despite most of them being young enough to serve another term based on retirement norms that had held for two decades. Li Keqiang, Wang Yang, Hu Chunhua and Chen Quanguo were all forced to retire early. (For a primer on Party factions see here.)
  • In their place, Xi elevated his own trusted confidants. In a remarkable consolidation of power, every single member of the Politburo Standing Committee, the apex of Party power, is now considered to be close to Xi. The depiction of Chinese elite politics as a technocratic meritocracy has always been tenuous, even at the height of collective leadership under Hu Jintao. But it is clear that official promotion has become less meritocratic under Xi, with loyalty and personal ties increasingly taking precedence over bureaucratic credentials.  
  • That’s most evident in the case of Li Qiang, the new number-two in the Standing Committee. Although government positions aren’t revealed until the National People’s Congress in March, Party protocol dictates that he will replace Li Keqiang as Premier. That would make him the first Premier since the Mao era not to have previously worked in the State Council as Vice-Premier. In fact, Li Qiang doesn’t have any central government experience at all. And his track record at the local level is hardly perfect – he bungled Shanghai’s initial response to the Omicron wave earlier this year. It was his personal ties with Xi – whom he previously served as chief of staff – that appear to have clinched his promotion over more qualified candidates such as Wang Yang and Hu Chunhua.
  • The rapid rise of Cai Qi, who is now on the Standing Committee despite having little senior leadership experience until recently, is another example of the growing importance of political patronage under Xi. Cai has been vocal in his praise of Xi, with whom he worked together in Fujian Province for 15 years.  
  • Just as noteworthy as the Xi allies who were elevated are those who were brushed aside. In particular, Xi’s childhood friend Liu He, in charge of the Central Financial and Economic Affairs Commission (CFEAC) and considered to be a key architect behind much of China’s recent economic policy, did not retain a seat on the Central Committee. Admittedly, he had reached the informal retirement age. But Xi has proven willing to make exceptions to that norm, not just for himself but also key allies – he has allowed 72 year-old Zhang Youxia, Xi’s man in the Military, to keep his seat on the Politburo.
  • This raises question marks about the extent to which Xi and Liu He saw eye-to-eye on the direction of economic policy. But whatever the reason, Liu He’s departure means the loss of one of China’s few foreign-educated and reform-minded economists in a top leadership position. He is expected to be replaced by He Lifeng, head of China’s state planner – the National Development and Reform Commission (NDRC). Once again personal ties are at play – He Lifeng attended Xi’s wedding and reportedly used to play basketball with him many years ago. Although He Lifeng is an academically-trained economist, much like Liu He, his track-record suggests he is likely to favour a more statist approach to economic management.
  • If He Lifeng does indeed get the job, his portfolio will overlap with that of the new Premier, Li Qiang. It remains to be seen who will have more influence in practice. Under Liu He, the CFEAC became the main venue for setting the direction of policy and Premier Li Keqiang was side-lined. But it is plausible that, with a close confidant in the role, Xi may want to restore some of the premiership’s previous stature.
  • One position where there is still hope for a purely technocratic appointment is PBOC governor. The Harvard-educated deputy governor, Yin Yong, was elevated to the central committee and sources close to the central bank told Reuters that he is the front-runner to succeed Yi Gang. But it’s worth keeping in mind that the PBOC is not an independent central bank. The State Council has to approve policy moves and has even taken to announcing RRR cuts ahead of the PBOC, in some cases contradicting PBOC forward guidance. Although Yin Yong is no doubt competent, he will have little choice but to take his cues from the State Council and Party leadership.
  • In addition to current PBOC governor, Yi Gang, the finance minister, Liu Kun, and head of the banking and insurance regulator, Guo Shuqing, have also stepped down from the Central Committee. It is not clear who will take their places and we may not find out until March. But given how the leadership reshuffle has played out so far, the risk is that more loyal but less competent individuals could be chosen. If Xi sticks to proven technocrats for these key roles, that would be reassuring for the quality of day-to-day policymaking. But it would have a little bearing on the overall direction of policy, which is now firmly under Xi’s control.
  • Indeed, one could be forgiven for questioning whether the details of Party personnel matter much at all in the era of Xi’s one-man rule. We think they still do, up to a point. Although Xi will continue to set the policy agenda, the specifics of how (and how zealously) that agenda is implemented depends on Xi’s subordinates. There is already evidence that the quality of policymaking has suffered in recent years as officials have becoming increasingly focused on displays of loyalty and less on good governance and economic performance. This trend may get even worse now that Xi has surrounded himself with “yes” men.
  • Ultimately, whether or not one believes Xi’s consolidation of power is good or bad for the economic outlook largely depends on one’s view of his policy agenda, which he laid out at in his opening address at the start of the Congress. In short, it appears to involve a shift away from market-based reforms in favour of a state-led campaign to increase self-sufficiency and economic security, along with a push to redistribute income and wealth. Our view is that it risks undermining productivity growth, rather than boosting it as hopeed. If so, the leadership will need to correct course at some point if they want to get China’s rapid catch-up growth back on track. But political environment that Xi has created will make such a shift difficult.
  • Perhaps of most significance in the long-run is that the question of who will succeed Xi remains unresolved. Once again, Xi refrained from elevating a next generation official from the Central Committee directly to the Standing Committee, the approach used by previous leaders to signal successors. Instead, he continued to fill the Standing Committee with established Politburo officials in their 60s who are considered too old to be viable successors. This suggests that Xi may be planning to stay on for a fourth term. The longer he remains in power, especially without a clear successor for the Party to rally around, the greater the risk of future instability should his policy agenda falter or his health deteriorate.

Julian Evans-Pritchard, Senior China Economist,