Leadership Transition and Economic Policy

During the next two weeks – November 8th to 14th, to be specific -, the Communist Party of China will hold its 18th National Congress in Beijing. On this occasion, the Politburo as well as its Standing Committee – the most important political structures in the PRC’s system – will be newly appointed, bringing about fundamental changes in the leadership’s personnel. As Thomas Koenig of the European Council on Foreign Relations puts it: “60-70% of China’s top leadership will retire”.

What is going to change, and will it affect China’s economic policy?

The exact outcome of the congress is still subject to speculation and will continue to be until the results are official. But anonymous sources even within days of the actual meetings now provided a new list of those who will most likely become members of the Standing Committee. Their information suggests the new line-up will consist of more conservatives than expected. Acknowledged reformers such as Wang Yang and Li Yuanchao who had been seen as having good chances to make it to the Committee in previous analyses are now likely to be omitted, while conservatives closer to party elder Jiang Zemin than to the current Hu-Wen-Leadership might fill all the ranks except for the top two spots, which are almost certainly going to be filled by Xi Jinping and Li Keqiang. If these assumptions are accurate, that might indeed have far-reaching consequences for the future of China’s economic development.

The conservative wing of the Communist Party holds dear to the belief that the state’s tight grip on key sectors such as the banking system is a decisive advantage for China that was responsible for the relatively small impact of the 2008 banking crisis on the country. Conservatives are also usually more sceptical of market reforms and liberalisation and tend towards being very protective of the state sector with its mighty SOEs. A conservative predominance in the Standing Committee would raise questions about its willingness to revive a stalled reform process (after high hopes had been raised for some last month) – especially because this reform process would likely tackle what conservatives see as an important pillar of the Chinese model.

It should however be noted that, despite being the largest re-arrangement in the Chinese leadership since the days of Mao, the 18th Congress is not likely to have an exceptional and prompt impact on economic policy. Even in case the conservative wing should really be able to claim the majority of top positions, the mode for economic policies has already been set in 2007, during the last Congress. Any new leadership, whoever might become or not become part of it, will be bound to the macroeconomic planning until at least 2015. Investors and economic decision-makers are therefore likely to watch the transition with less excitement – perhaps with less anticipation as well – than those directly concerned with its political outcome.