More Questions Than Answers: Assessing China’s Leadership Transition

Capping months of public speculation and behind-the-scenes political maneuvering, China’s 18th Communist Party Congress officially ended on November 15, setting the stage for a new roster of leaders who will rule China for the next decade. As expected, Xi Jinping succeeded Hu Jintao as the Party general secretary and was also named chairman of the Central Military Commission, which oversees the country’s armed forces. In addition, vice premier Li Keqiang moved into position to replace Wen Jiabao as prime minister when government posts are staffed next spring. A seven-member list of members of the Politburo Standing Committee has been released. Still, experts say recent events suggest unresolved differences remain among various Party factions and interest groups. These ultimately show just how fragile the political process remains for one of the world’s most powerful countries.  

To be sure, China’s Communist Party is at little risk of losing its grip on power in the leadership changeover. Over the past 30 years, Party leaders have worked hard to establish more institutionalized and stable succession procedures. Yet experts say that with the purge of former Chongqing Party chief Bo Xilai this spring — along with the weeks-long unexplained absence of Xi Jinping in September and other events — political uncertainty in China actually increased, rather than the opposite, as senior leaders struggled in the past few months to re-establish internal equilibrium.

As a result, the new leaders are expected to focus on self-preservation and the need to restore the Party’s image in the coming months, and may become both more risk-averse and more brittle. In particular, perceived challenges to Chinese sovereignty — including outside complaints about Chinese economic or trade policies — or to internal stability may well prompt exceptionally inflexible or even harsh responses in the months ahead.

In addition, recent events have brought even more than the usual uncertainty into assessments of implications of the transition for investors and global businesses operating in China. “We have no idea what the policies of Xi Jinping are going to be,” says Marshall Meyer, a Wharton professor of management. “He’s been very careful. Will he be another Hu Jintao? Will he be another Zhu Rongji? Nobody knows. That’s probably the most fundamental inflection point coming up soon [but] it will take a few years to know what direction China takes.”

Christopher Mark, head of EmergingSignals:China, a service focused on China economic and political analysis, notes that global businesses can expect no near-term changes in the operating environment in China, as the new leadership team will be intent on avoiding destabilizing moves during the transition period — especially between now and next March, when the new government positions are to be filled — and on trying to keep the nascent economic upturn on track. Foreign-invested enterprises are a critical part of this equation, notably in the politically-influential eastern coastal provinces. Global companies that target China’s rapidly-evolving consumer and IT markets, as well as the construction and automotive sectors, should be able to profit from Beijing’s avowed intention to re-orient the economy toward domestic consumption, expand housing and develop new urban centers in the interior, Mark says. 

Moreover, experts point out, some weight needs to be given to the personal inclinations of Xi Jinping. Even though Xi’s policy objectives are still obscure, he has a reputation among Western executives who have dealt with him as a pragmatic supporter of market-friendly approaches to economic development. This is based in part on his father’s key role in the early 1980s in the initial stages of China’s economic reform and opening to foreign investment, as well as to his own experiences early in his career as an official in the export-oriented Fujian and Zhejiang provinces.

Nevertheless, China’s leadership inner circle is a consensus-based institution, and too much should not be read into Xi’s presumed preferences, experts say. The new membership of the all-powerful Politburo Standing Committee is quite conservative, in the sense of being averse to meaningful political reform and supportive of a heavy-handed internal security apparatus. As such, longer-term investment risks associated with mounting social pressures and potential instability will remain high. There is also nothing in the new leadership team that would point to a reversal of recent trends toward a more protectionist operating environment (fueled by an upsurge in nationalist sentiment, currently directed at Japanese firms) and toward increasing industry concentration that favors politically-connected state enterprises, observers note.

Quiet Power Struggle

By all accounts, China’s transition got off to a rough start. The corruption accusations against Bo Xilai, who earlier in the year was considered a contender for the country’s supreme policymaking body, put the Party’s leadership maneuverings in an unaccustomed public spotlight. Experts say they also intensified a factional battle between the relatively more reformist wing of the Party associated with President Hu Jintao and Premier Wen Jiabao, and conservatives allied with former President Jiang Zemin.

“The struggle over the future direction and ideology of the Party reflects differences between leaders who, like Bo, pushed for a stronger state role in the economy and society and are closely allied with military leaders, and more reformist leaders affiliated with Hu and Wen, some of whom have been championing the private sector, civil society and the rule of law,” says Mark.

Many China experts suggest that because the Bo Xilai affair derailed plans for a seamless and well-orchestrated transition, contending factions within the Party have set aside differences and settled on a leadership roster consisting of well-established and relatively noncontroversial figures. In addition to Xi and Li, the Politburo Standing Committee has five members. They are Wang Qishan, a vice premier with experience in financial and economic policy; Yu Zhengsheng, Party chief in Shanghai; Zhang Dejiang, who replaced Bo Xilai as Party chief in Chongqing; Tianjin Party chief Zhang Gaoli and Party propaganda chief Liu Yunshan.

Western analysts have been frustrated by the paucity of information about the policy preferences of China’s prospective new rulers. However, some factors could prove significant. For instance, both Xi and Li are believed to be more versed in international political and business dealings than were their predecessors when they took office 10 years ago. Xi served in Fujian in his early career and was later named party leader in Zhejiang, both booming coastal provinces that were at the forefront of China’s economic reform and opening to foreign investment in the 1980s.

Recently, Xi’s associates have been playing up signals that he may be willing to pursue bolder economic reforms and tackle corruption. According to reports in the Chinese press, Xi met with the son of the late reformist Party chief Hu Yaobang and hinted at the prospect of forthcoming reforms. At the same time, he also has strongly backed China’s behemoth state-owned enterprises.

Both outgoing and incoming leaders will grapple with challenges to the Party’s legitimacy as the transition unfolds, however. Experts note that renewed emphasis on professional competence within the bureaucracy and the ability to deliver improvements in living standards — along with appeals to nationalist fervor — may bolster the Party leadership’s standing with the Chinese public, despite dissatisfaction with local governance and cynicism about endemic official corruption.

Social Tensions

While public anger has in the past been directed mostly at lower-level officials, the impact of the Bo Xilai case and other emergent scandals could contribute to a growing perception of dissoluteness in Beijing, presenting problems for senior leaders who are looked upon to ensure the moral state of the nation.

In particular, Bo’s dismissal, and the sensational murder trial of his wife, Gu Kailai, hurt the Party’s credibility with upwardly-mobile urban elites, especially in light of allegations that the two had been involved in moving large sums of money illegally out of the country, observers say. Following Gu’s conviction in August, China’s Internet was flooded with messages expressing outrage that she had evaded the death penalty despite being found guilty of premeditated murder — an outcome considered by many to represent special treatment of a member of the political elite.

In another recent flashpoint, Ling Jihua, a close ally of outgoing Party chief Hu Jintao, was demoted on September 1 from his position managing the daily activities of the top leadership. The announcement came after press reports that his son was killed, and two women seriously injured, while driving a Ferrari.

However, because Bo Xilai had built his public reputation by exploiting social discontent, and tapping into popular resentment over inequality and official corruption, Party leaders are expected to make strenuous efforts to get out in front of these issues in the wake of the purge. As an example, Premier Wen recently called for holding officials more strongly accountable and making the results of investigations public. In other recent comments — including criticism of the monopolistic position enjoyed by state banks, pushing for economic restructuring in favor of boosting consumer spending, and emphasizing the crucial role played by small firms, innovators and entrepreneurs over that of state-owned enterprises — Wen signaled support for more reforms.

China’s big state enterprises, which now count as some of the world’s most valuable companies, may in fact prove to be a bellwether for China’s economic future. “I think continuation of the present policies will alone [impede] or slow or cap economic growth a bit, because under Hu Jintao there’s been a resurgence of the wealth, and to some extent, the power of the state enterprises in China,” notes Wharton’s Meyer. “Fewer people are employed by the states, the SOEs are responsible for less and less of overall output and GDP, but still their centrality in the economy has gone up. So the question is whether there’s going to be a second and vigorous wave of privatization in China, turning toward a more capitalist system. We don’t know the answer, but it is a very fundamental question.”

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