Xi Jinping set to overhaul China’s economic policy team at watershed congress

In Beijing, the number of guards at the Great Hall of the People has doubled and Tiananmen Square has been closed to tourists as the government ramps up security for this weekend’s lianghui, the “two sessions” that make up China’s biggest political event of the year.

But the real show of strength will be inside the meetings of China’s rubber-stamp parliament and its top political advisory body. Xi Jinping, the country’s most powerful leader since Mao Zedong, is preparing to use the National People’s Congress, which kicks off on Sunday, to launch a “forceful” overhaul of the government by appointing his most trusted acolytes to oversee the financial, technology and other sectors.

Premier Li Keqiang, the current head of government, and his team of technocrats credited with steering the economy through the turmoil of the past five years will be replaced. Important portfolios such as the financial sector may be restructured.

Xi pledged at a meeting on Tuesday that the party was planning “far-reaching” changes which, aside from financial sector reform, would include exerting closer control over the technology and science sectors and — perhaps most ominously for business — increased party involvement in “non-public enterprises”.

The changes come at a sensitive moment for China’s economy, which was hamstrung by Xi’s draconian zero-Covid strategy last year and regulatory crackdowns on the tech and property sectors that have damaged business sentiment. Gross domestic product in 2022 grew just 3 per cent, well below the official target of 5.5 per cent.

While growth is expected to rebound this year — manufacturing activity grew at its fastest monthly pace in a decade last month — the new team will have to convince sceptical investors that China has reopened for business in earnest and is ready to tackle longstanding structural headwinds including rising government debt, population decline and lagging productivity.

“The top priority of the congress will be to chart a course for growth both in the short term and to try to convince domestic and foreign investors that there is a path for long-term sustainable growth,” said Victor Shih, professor of Chinese political economy at the University of California, San Diego.

In October, Xi executed a clean sweep of the seven-member Politburo Standing Committee, stacking the Chinese Communist party’s highest decision-making body with loyalists at the quinquennial party congress.

Xi was also confirmed as party secretary and military chief for a third five-year term, a precedent-shattering move set up in 2018 when the NPC changed the constitution to scrap a two-term limit. This month, the parliament will complete the formalities by reappointing Xi as president.

He is expected to mirror the reshuffle of the CCP’s leadership in the government’s top ranks, which will boast a team of new faces drawn heavily from Xi’s past.

The Chinese leader is expected to elevate Li Qiang, the former Shanghai party chief whom Xi worked with as governor of Zhejiang province in the 2000s, to premier and head of China’s State Council, or cabinet.

The outgoing team is led by economic tsar Liu He, a Harvard-trained economist who is widely credited with launching a financial “de-risking” campaign in 2017 to restrict shadow banking and debt accumulation and prevent a financial crisis.

The administration, which warned against flooding the economy with stimulus, managed to slow — though not stop — the expansion of China’s debt, which has reached 273 per cent of GDP from 150 per cent before the global financial crisis, according to Gavekal Dragonomics, a research group.

By contrast, officials such as He Lifeng, a Xi protégé who is expected to replace Liu, spent most of his career as a local politician. He might be more inclined to answer immediate political needs at the expense of conservative long-term monetary policy, analysts said.

“Of course, we know the central bank has always been a government organ that obeys the overall direction of the Communist party. That’s by design,” said Shih. “But it has been run by career technocrats for decades.

“By appointing career local government politicians . . . that could have the effect of putting short-term political objectives well ahead of medium-term policy objectives.”

In a further move that will consolidate control over policymaking, the party has discussed a proposal to set up a super committee overseeing the central bank and other financial regulators, two people familiar with the matter said.

If adopted at the NPC, the new entity would be a more powerful party-led version of an existing body, the Financial Stability and Development Committee, which is supervised by the State Council, the people said.

While the existing committee only co-ordinates financial regulation between bodies, the new committee would be empowered to quickly make decisions on cross-sector risks such as the collapse of Evergrande, the country’s most indebted property developer, the people said.

The top candidates to lead the new body are He and Ding Xuexiang, Xi’s powerful chief of staff. Lu Zhiyuan, the party chief of the coastal city of Qingdao, meanwhile, is among the top candidates for finance minister.

Whatever doubts market watchers might harbour about Xi’s new administration, it will benefit in the near term from an economic rebound triggered by the end of zero-Covid, analysts said.

The NPC is expected to set a full-year GDP growth target of 5 to 5.5 per cent, said UBS economist Tao Wang, adding the new government could also try to boost growth by channelling more funds to the property sector or to boost consumption.

“I also see upside from policies that could be a bit more supportive than expected,” Wang said.

Economists, however, pointed to the challenge of sustaining higher growth beyond the post-Covid rebound, especially if China is to achieve its goal of becoming a “moderately prosperous” society by 2035.

This would require average annual growth of 3.5 per cent through 2035 to reach the threshold of $20,000 of income per capita per year, said Robin Xing, chief China economist at Morgan Stanley.

“It’s more about the next debate beyond this one-off boost,” said Xing.

Achieving sustainable long-term growth would require daunting decisions on questions such as how to boost consumption as a share of activity in an economy that still invests too much as a percentage of GDP and how to resolve growing local government debt, analysts said.

“We’ll probably get good growth this year and everyone will be happy,” said Michael Pettis, a finance professor at Peking University. “But it’s only temporary.”