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Home , Princelings, Wen Jiabao, Yu Zhengsheng

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China Monthly Report

Highlights • Party consummates power handover > November • Economic outlook and business climate under Xi > Edition • Foreign relations in holding pattern during transition > 27-November-2012 • Looking ahead… >

Party consummates power handover coming Standing Committee members are Jiang allies belonging to the Party’s so-called faction. After months of intensive behind-the-scenes political A majority also are ‘’, or offspring of the maneuvering, ’s 18th Communist Party Con- Party’s revolutionary heroes. gress (CPC) concluded on November 15 by anointing a new leadership team to rule China for the next five As decided at the CPC, China’s new top leadership years. As expected, succeeded comprises: as the Party general secretary and was also named chairman of the body overseeing the country’s armed • Xi Jinping, a princeling and Jiang associate with a forces. Xi is now assured to succeed Hu as president, reputation among western executives who have dealt and moved into position to replace Wen with him as a pragmatic supporter of market-friendly Jiabao as premier, when government positions are approaches to economic development. This is based in filled at the annual session of the National People’s part on his father’s key role in the initial stages of China’s Congress next March. economic reform and opening to foreign investment, as well as to his own experiences early in his career as an The leadership transition now underway promises to be the first in the history of modern China involving official in export-oriented Fujian and Zhejiang provinces; simultaneous handover of all major levers of power at the same time, Xi also has been a strong backer of without sweeping purges or political unrest. Neverthe- China’s behemoth state-owned enterprises. less, the lack of transparency in the Party’s decision- making, and unresolved differences among its various • Li Keqiang, a close ally of Hu who served as Premier factions and interest groups, point to a still-fragile ’s top lieutenant on the State Council, political process going forward. known for having a sharp intellect and even-tempered demeanor, but criticized by some for having been an The new leadership lineup. As anticipated, the indecisive leader in previous positions. Politburo Standing Committee -- China’s supreme policymaking body -- was reduced in size from nine • , a princeling, Jiang ally, and former vice members to seven, a move apparently intended to premier responsible for finance. Seen as a hard-nosed facilitate collective decision-making in the Party’s problem-solver, Wang will lead the Party’s efforts to consensus-bound inner circle. A central element in the political horse-trading that decided the new leadership contain corruption as head of the Central Commission lineup was rivalry between coalitions affiliated with for Discipline Inspection. Hu and with his predecessor, . Although several of Hu’s proteges were moved into subsidiary • , a princeling and Jiang protege, was posts that could make them leading candidates for Party chief in Shanghai known for views supporting promotion at the 19th CPC in 2017, most of the in- advancement of the private sector, urban development,

© 2012 American International Group, Inc. All rights reserved. and legal reform. At 67, he is the oldest member of the reports in the Chinese press, he recently met with the new Standing Committee. son of the late reformist Party chief and hinted at the prospect of forthcoming reforms. How- • , a princeling, Jiang ally, and North Korea- ever, skepticism about leaders’ commitment to mean- trained economist who replaced purged leader ingful reform is widespread among users of Chinese as Party chief in . Zhang will likely continue social media. to promote development of state monopolies as well as Both outgoing and incoming leaders will grapple with forms of economic protectionism known as indigenous challenges to the Party’s legitimacy as the transition innovation policies. unfolds. Renewed emphasis on professional compe- tence within the bureaucracy and the ability to deliver • , an ally of Xi and Jiang, was Party chief in improvements in living standards -- along with appeals who had extensive leadership in economically to nationalist fervor -- may bolster the Party leader- booming areas, including Shenzhen and Shandong, and ship’s standing with the Chinese public, notwithstand- is known for pro-market policy leanings. ing dissatisfaction with local governance and cynicism about endemic official corruption. • , the former head of the Party’s propaganda department who is likely to continue pursuing policies Economic outlook and business climate of tight control over media and the internet. Liu formed under Xi close ties with Hu when both worked for the Communist Youth League. Global businesses can expect no near-term changes in the operating environment in China, as the new Who was left out of the inner circle. Among the leadership team will be intent on avoiding destabiliz- Party leaders who did not make it into the Politburo ing moves during the transition period -- especially Standing Committee were two figures with the stron- between now and next March, when new government gest track record on political reform: , the positions are to be filled -- and on trying to keep the head of the Party’s Organization Department, who nascent economic upturn on track. Global compa- had overseen pilot programs to enhance democratic nies that target China’s rapidly evolving consumer processes within the Party; and , the Party and technology markets, as well as the construction chief of Guangdong province, who won international and automotive sectors, should be able to profit from recognition last year when he brokered a settlement ’s avowed intention to re-orient the economy after residents of a fishing village rebelled over land toward domestic consumption, expand housing, and seizures by local officials. The sidelining of putative develop new urban centers in the interior. reformists, along with the predominance on the new Standing Committee of princelings (whose commit- Both Xi and Li are believed to be more versed in ment to continued Party dominance presumably is international political and business dealings than were unshakeable), signals resolve by Party elders to favor their predecessors when they took office ten years ago. continuity over change, and to re-establish internal Nevertheless, the new membership of the all-powerful equilibrium after a year in which high-profile scandals Politburo Standing Committee is economically as well fueled political uncertainty. as politically conservative, and longer-term investment risks associated with mounting social pressures and Tackling graft and other priorities. Foremost potential instability will remain elevated. There is also among the challenges facing the new leadership is nothing in the new leadership team that would point the need to crack down on corruption in order to quell to reversal of recent trends toward a more protection- social discontent and restore the Party’s credibility. Hu ist operating environment -- fueled by an upsurge in said in his opening speech at the CPC that official nationalist sentiment, currently directed at Japanese corruption has become so serious that, if not tack- firms -- and toward increasing industry concentration led, it could cause the collapse of the Party, and in a that favors politically connected state enterprises. speech to the new Politburo November 17, Xi warned that spreading corruption would ‘doom the Party and Manufacturing data signals rebound gath- the state’. Recently, Xi’s associates have been play- ering pace. A sustained rebound in the Chinese ing up signals that he may be willing to pursue bolder economy in 2013 could smooth the transition for the economic reforms and tackle corruption: according to incoming leadership team and lessen the need for

© 2012 American International Group, Inc. All rights reserved. additional monetary stimulus. Some economic indica- Jiechi are set to retire in March, and there have been tors in recent weeks have pointed to a nascent recovery, calls for raising the profiles of their successors to enable with exports rising in October at the fastest pace in five them to better coordinate with other agencies, especially months and industrial output and retail sales exceeding the military. Beijing’s relations with Washington will be forecasts. And notwithstanding an unexpected decline in shaped by pending decisions on who is to succeed US new lending, a key business survey published November Secretary of State Hillary Clinton and Treasury Secretary 21 signaled the first expansion in 13 months, adding to Timothy Geithner, and while Xi may take a more assertive signs that Chinese economic growth is rebounding fol- stance in some areas of Sino-US relations, he is unlikely lowing a seven-quarter slowdown. to depart substantially from his predecessors in the early stage of his tenure. Beijing’s diplomatic relations with Muted prospects for economic reforms. Recent Tokyo, currently strained by bitter feuding over contested data show China’s wage gains have moderated, and islands in the East China Sea, will remain on hold until deeper declines would undermine efforts by the new after next month’s election in Japan. leadership to boost consumer spending and shift the economy away from dependence on investment and exports. Both Xi and Li have signaled interest in reforms Looking ahead … to bolster growth over the next decade, but for the short term they will likely be preoccupied with consolidating Setting policy course for 2013. China’s incoming power and maintaining political stability. Based on past and outgoing leaders will oversee the Central Economic precedent, the most likely time for launching of any ma- Work Conference in early December, which will chart jor economic reforms would be next fall, when the 18th economic policy for 2013. Neither Premier Wen Jiabao Central Committee will hold its third plenary session. nor his presumptive successor, Li Keqiang, is likely to seek significant changes in policy direction, unless pushed Foreign relations in holding pattern by outside events such as a sudden worsening in global during transition financial markets or by a sharp downturn in China’s employment situation. Some observers anticipate the For the next four months, Xi Jinping will head China’s conference may lower the 2013 growth target to 7% from power structure as Party general secretary but Hu Jintao this year’s 7.5%, giving some latitude for the new lead- will continue formally as head of state until Xi succeeds ership to launch reforms without exacerbating inflation. him as president next spring. During this period, rela- Others, however, believe Li will want to maintain a higher tions with two key players in Asia-Pacific diplomacy -- Ja- rate of growth in the first year of his tenure to avoid shak- pan and the United States -- will be marked by uncertain- ing market confidence, even while steering more invest- ty pending decisions on staffing of key positions. China’s ment to improving industrial efficiency, to the services top diplomat, , and Foreign Minister Yang sector, and to supporting innovation.

The China Monthly Report is produced by AIG Global Risk Assessments. For more information contact David Lay, at 212-770-0586 or [email protected]

© 2012 American International Group, Inc. All rights reserved.