Anyone Expecting Big China Reforms Is Now In For A Massive Disappointment

china paramilitary policeman tiananment square

AP Photo/Alexander F. Yuan

China has wrapped up its 18th Congress and it is now clear who will be leading the world's second largest economy.

Xi Jinping was named the Head of China's Communist Party (CPC) and chairman of the country's Central Military Commission. In the new year, he will officially take over as president of the country from Hu Jintao. Li Keqiang will take over from Wen Jiabao as China's next premier. The new Politburo Standing Committee – China's most important decision making body – has been unveiled. And we're waiting to see the make-up of the 12-member Military Commission.

For investors around the world watching the leadership transition in China, seen as an engine of growth in the global economy, there isn't much to celebrate.

Party makers have certainly spoken a fair amount about 'people's well being' and 'institution reform'. But everything we've seen suggests that marked reforms will not be coming any time soon.

First, it is evident that Jiang Zemin and his conservative 'princeling' faction won the battle in the make-up of the PSC, since he successfully finagled more of his allies on to the PSC. President Hu's allies Liu Yuanchao and Wang Yang, both looked at as reformers, were left off the list.

Remember, in China party elders stick around and try and maintain influence over the Communist Party and its workings. Conservatives have  been hesitant about floating the yuan or reducing the role of state-owned enterprises in various industries since they benefit high-level officials.

Societe Generale's Wei Yao writes that based on the reports from the 18th Party Congress it would appear that the party is scaling back the role of SOEs.

"Regarding state-owned enterprises, there is no longer this expression of ‚the state sector being the mainstay.‛ Instead, leveling the playing field for the private sector is stressed more. Government capital should focus more on strategic industries, such as those related to national security.

Our interpretation is that Beijing is considering scaling back SOEs’ influence in sectors where private enterprises should have been given more space to grow."

Simon Rabinovitch of the Financial Times writes that Wang Qishan's appointment to the position of secretary of the Central Commission for Discipline Inspection is one of the most disappointing and worrisome developments:

"The biggest disappointment is the relegation of Wang Qishan, a strong voice for change, to the lowest-ranked position in the standing committee of the politburo, the seven-person team that forms the core of China’s leadership.

Many had hoped that Mr Wang, previously a vice premier responsible for economic and financial affairs, would be given even more authority over the economy. Instead, he will head a discipline inspection body that conducts corruption investigations."

China PSC

Vincent Yu/AP Images

Moreover, Rabinovitch writes that the appointment of Zhang Gaoli to the role of executive vice premier is disappointing since he drove growth, as party secretary of Tianjin, by taking on vast amounts of debt and helping create ghost towns and bridges to nowhere. Methods that are quite removed from a rebalancing of China's economy.

Liu Yunshan, head of the propaganda department's appointment to the PSC was also largely interpreted as a negative. This is being considered a move to limit freedom of speech, especially online where sites like Weibo had become an important part of the country's social consciousness and an avenue of protest.

On the political front, as we pointed out Hu Jintao's speech made very clear that the country would "never copy a Western political system".

Cheng Li of Brookings said that the speech by Hu essentially paved the way for Xi and that China will lean towards more intra party democracy. As we know China has no opposition party but factions within the Communist Party that fight for power.

He also believes that the Party is extremely worried about losing legitimacy and that he is "encouraged" by Hu comment's on corruption.

In this regard at least, Wang's appointment as the head of Central Commission for Discipline Inspection might be heartening since he is described as China’s "definitive preeminent troubleshooter, firefighter, problem solver," according to Treasury Secretary Tim Geithner.

But China expert Menxen Pei of Claremont McKenna College isn't as hopeful. In an interview with the Wall Street Journal (published before the PSC was elected) he said that the decision making process is still opaque:

"I’ve looked at economic decision-making as case studies.  What I’ve found is that the regular process can always be disrupted by the sudden intervention of people who are either retired or who have power over a different area of policy.

In other words, it is still a rule-by-man system not a rule-by-procedure system.  And then, when you look at how they select the top leaders today, even now, at the very last minute, we do not know the makeup of the Politburo Standing Committee.  We do not know the criteria under which people are selected."

Bottom line – We still believe that the Communist Party is worried about social unrest and they are trying hard to maintain control. It's why they're trying to double per capita income certainly. But if you're looking for major political or economic reforms it will be a 10-year wait, at the very least.

SEE ALSO: Everything You Need To Know About China's New Leader Xi Jinping >



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