By: Benjamin Cooper and Philippe Healey

Approaching the half-decade marker of his tenure in office, President Xi puts the final brushstrokes on his strategic canvas for a new China

First-term twilight

With China’s autumnal political succession at the 19th Party Congress looming ever larger on the horizon, we are now entering the final inning of President Xi Jinping’s first term in office. This provides an opportune moment to cast our gaze into the rearview mirror and assess his administration’s balance sheet in terms of where it has steered the Chinese ship of state and economy while at the helm over the past five years.

In particular, we will examine what have thus far emerged as the hallmarks of his presidency and look set to eventually crystalize into the defining legacies of the Xi era. As the first entry in a series, this article will begin by exploring the following:

  • Xi’s overarching vision to rejuvenate and restore the Chinese nation to its historical position of grandeur
  • The Third Plenum’s landmark reform manifesto hammering out a roadmap for refashioning China’s economic and political governance models
  • The largest and most extensive corruption purge ever carried out since the founding of the PRC

As always, we will consider the impact on our clients in both the domestic and foreign business communities throughout our review.

The China inherited by Xi

Before assessing where Xi has guided China over the past half-decade, it is first necessary to understand the launch point from which his administration embarked and recognize that the China bequeathed to Xi by his predecessor was very different from the one Hu Jintao inherited at the start of the millennium. President Hu had presided over an era where China’s role in the world was dramatically transformed, with the country’s accession to the World Trade Organization (WTO) in December 2001 kicking off a phase of extraordinary economic growth, which the Hu administration managed to sustain throughout its tenure. By the time Xi took the reins in late 2012, the Chinese economy had expanded four-fold over the previous decade and been catapulted onto the global stage as the world’s second-largest economy, its biggest trading nation and manufacturing power, and an indisputable economic superpower.

However, the hyper but unbalanced growth of the 2000s, while yielding tremendous gains for China in terms of its global stature and the standards of living for Chinese people, was also the origin of many of the economic challenges confronting China today, such as a large and still-accumulating debt pile, surplus productive capacity, and property bubbles. When Xi assumed office, Chinese society was increasingly strained under pressures arising from a host of issues that had been exacerbated by the breakneck growth of the preceding decade, including widening inequalities, pervasive corruption, the impact of environmental degradation, and more.

The big dream

Just weeks after taking power in late 2012, Xi publicly unveiled the “Chinese Dream,” which he described as, “realizing a prosperous and strong country, the great rejuvenation of the Chinese nation, and the well-being of the people,” as the herculean mandate that would define his first term in office and beyond.[1] Seeking to redirect China’s course of development onto a more sustainable and inclusive trajectory, the Chinese Dream is being benchmarked by two aspirational centennial goals known as the “Two 100s.” The first aims for China to become a “moderately well-off society” by 2021, the 100th anniversary of the Chinese Communist Party, while the second is the extreme long-range strategic goal of fully modernizing China by 2049, the 100th anniversary of the PRC. Together, these two grand goals hope to drive continued growth and prosperity in China, with a particular focus on raising the well-being of Chinese people, and ultimately restore the country to its past historical greatness on the world stage.

Following the introduction of his vision for China’s future, Xi’s selection of Guangdong province – ground zero for China’s initial drive to reform and open up – as the destination for his inaugural domestic visit was clearly no accident.[2] His trip carried strong echoes of Deng Xiaoping’s famed “Southern Tour” in 1992, signaling not only that reform would be a pillar of his administration but also that Xi intended to emerge as a leader who would wield as transformative of an impact on China as his venerable predecessor had.

Xi later laid out his guiding principles for achieving the Chinese Dream under the “Four Comprehensives,” the signature political slogan of his first term, while visiting Jiangsu province in December 2014.[3] As a broad summation of Xi’s national strategic agenda, the Four Comprehensives seek to promote economic prosperity, deepen reforms, strengthen the rule of law, and toughen Party discipline. In practice, they encapsulate his administration’s focus on priorities such as sustaining growth and recalibrating China’s economic development model, improving people’s well-being and quality of life, fine-tuning the role of government, pushing for greater legal reforms, and cracking down on corruption. The Four Comprehensives may well represent Xi’s intended theoretical contribution to the political and economic doctrines of China’s top leaders, following in the footsteps of Hu Jintao’s “Scientific Outlook on Development,” Jiang Zemin’s “Three Represents,” and Deng Xiaoping’s “Four Modernizations.”

The Third Plenum’s vehicle for reform

In November 2013, the Xi administration rolled the major vehicle for driving towards the Chinese Dream out of its policy shop at the Third Plenum of the 18th CPC Central Committee, the first major political gathering held under Xi’s leadership. Known as “The Decision,” the 60-item blueprint outlined the contours of Xi’s agenda for recalibrating the roles of the market and the state through a wide-ranging slate of reforms. For the economy, this entailed pushing for greater economic liberalization, in particular by providing the market with a “decisive role” in the allocation of resources. On the political side, it focused on pushing for better governance and empowering the Party leadership’s role in driving the overall process of reform on all fronts. In addition, the reform program included significant provisions aimed at reshaping China into a more inclusive and equitable society.

The reform directives promulgated at the Third Plenum signified the new leadership team’s recognition that China’s tried-and-true development pattern of maximizing growth above all else was fraying and no longer tenable in the long term. For the new president, the bold prescriptions for addressing the structural economic malaise and social pressure points that had accumulated over years of high-speed growth, unveiled just one year into his tenure, emphasized the remarkable degree to which Xi had already consolidated his power at a very early stage in his presidency. And for China, Xi’s ambition to dramatically rewrite its economic and political governance models appeared to promise a sea change in the way Beijing ran the country and chalk off another historical turning point on its path of development.

We will now explore what shape the Third Plenum’s reform manifesto has taken in practice to date following its introduction nearly four years ago and what we may expect to see after crossing the bridge of the 19th Party Congress and entering into Xi’s second five-year term.

Providing the market with a “decisive role”

The Chinese leadership first emphasized the need to correct the economic imbalances created by China’s heavy reliance on exports and investment and transition the economy more towards a consumption- and services-driven growth model as early as March 2007, when then-Premier Wen Jiabao famously declared that China’s growth was, “unstable, imbalanced, uncoordinated, and unsustainable.”[4] Six and a half years later, the Third Plenum’s blueprint for reform hammered out the Xi administration’s intention to dramatically build upon this national strategy to carry out a major structural adjustment in the economy and diversify the main engines of Chinese growth that was originally enshrined in the 12th Five-Year Plan (2007-2012). In particular, the reform agenda included calls to further drive development of the private sector and reform state-owned enterprises (SOEs), expand financial and fiscal reforms, and liberalize market access for foreign companies. As mentioned earlier, the Xi administration’s pledge to make market forces decisive was the overarching vehicle for achieving such goals. Although no specific timetable was set in The Decision for implementing the proposed reforms, it did state that “decisive results are to be obtained in key areas in 2020.”[5]

Following the Third Plenum, Xi further clarified the leadership’s new economic thinking by introducing the concept of a “new normal” for Chinese growth, which quickly became the government’s mantra for the economy in his first term. De-emphasizing the longstanding political imperative of achieving impressive headline GDP growth, the new normal represents Beijing’s recognition that the double-digit heydays of growth before the global financial crisis are now long gone, with the Chinese economy having slowly but steadily decelerated from its peak of 14.2% in 2007 to eventually hit a quarter-century low of 6.7% last year. It entails a far greater prioritization on the quality rather than the quantity of growth and the bid to shift China onto a more sustainable long-term trajectory through the recalibration of its growth paradigm.

Above all, while guiding China into its new normal of weaker growth, the Xi administration has sought to prevent the economy from suddenly veering off a cliff and plunging into a disorderly and destabilizing slowdown, particularly ahead of the 19th Party Congress. To do so, it appears to have settled on supply-side structural reforms, which were featured prominently in the 13th Five-Year Plan (2016-2020), as the latest finessing of the Third Plenum’s economic reform agenda and its primary vehicle of choice for reining in the most troublesome excesses weighing down the Chinese economy, such as the country’s spiraling debt load and severe over-capacity in certain heavy industries. Beijing’s policymakers have housed a wide array of reforms under the supply-side mantle, including further opening up market access to foreign companies, reducing taxes, cutting red-tape, and boosting innovation.

Nothing but the mirage of economic reform?

Nearing the end of Xi’s first term in office, economists and international businesses are busy appraising the progress-to-date on the Third Plenum’s much heralded vision for economic liberalization as well as its future prospects. The general consensus seems to be that Beijing’s track record in delivering on the promised reforms has been mixed at best. Many have grown increasingly frustrated with what often appears to be stasis and even backtracking on the liberalization front, with critics harboring skepticism about the government’s resolve and willingness to actually push ahead with its reform agenda. For example, the Third Plenum’s planned overhaul of the vast state-owned enterprise (SOE) complex, particularly its calls for mixed, private-public ownership of SOEs, appears to have hardly moved forward. China’s overall debt has continued to rise, reaching around 265% of GDP at the end of 2016. Fiscal revenue reform has remained limited, and local authorities are still depending on land sales deals for revenue.[6] And for foreign companies, the government’s grand proclamations on liberalizing market access and creating an equal playing field must often appear to be little more than a mirage at which they are always grasping at but never actually see materialize into hard action on the ground.

So what has stymied economic reforms from progressing more rapidly? In particular, the Chinese leadership is no doubt wary of moving ahead too aggressively and losing control of the economy, especially at a time of a sustained slowdown and heightened risk of volatility, as evidenced by the stock market turbulence that began in the summer of 2015 and ended in early 2016. A sudden economic downdraft, especially in the build-up to a large-scale political succession such as the 19th Party Congress, would be anathema to Beijing. To at least a certain degree, reforms have consequently been shunted onto the backburner in the interest of meeting Chinese authorities’ premium on maintaining stability. And beyond the looming political transition, the other major bottleneck to the Third Plenum’s reforms has arguably been fierce opposition from entrenched special interest groups, such as SOEs and local governments. Such vested interests have benefited hugely from China’s old growth model, and many are likely contesting, or at least dragging their feet, on the transition to a new economy.

But is the big picture on Beijing’s delivery of the Third Plenum’s reform package and overall economic restructuring truly as gloomy as it is often portrayed overseas? To be sure, it is understandable why many have been disheartened by what must seem to be the glacial pace of implementation and lack of meaningful progress on certain aspects of reform. At this early stage, however, it is still premature to judge too harshly the current outcomes of the Third Plenum’s to-do list. The enormity of achieving a major directional shift in an economy as large as China’s should not be underestimated, nor should the lengthy timeframe required to do so.

Furthermore, China is making genuine – albeit incremental – progress on many elements of reform and economic rebalancing. For example, the country’s GDP share of the secondary sector, or manufacturing and construction, declined from 47% in 2007 to 40% in 2016, while the share of the tertiary sector, or services, rose from 43% to nearly 52%.[7] The scale of this structural shift is not marginal and indicates real headway being made towards a services-driven economy as the role of the industrial sector slowly subsides. In terms of opening up, the inclusion of the RMB as part of the IMF’s special drawing rights (SDR) basket of currencies last year marked a significant step towards the Chinese currency’s internationalization, while the establishment of the Shanghai Free Trade Zone in 2013, following which 10 other provinces and cities were since approved to establish such zones, and set up of trading links between the Hong Kong Stock Exchange and the mainland bourses in Shanghai and Shenzhen in 2014 and 2016, respectively, have all created new testbeds for China’s continued selective opening of its economy.[8] In addition, Beijing’s formation of the Asian Infrastructure Investment Bank (AIIB) in support of its Belt and Road initiative is expected to further facilitate the overseas deployment of state-directed Chinese capital. Other notable areas of progress include Beijing’s efforts directed at encouraging innovation and entrepreneurship at home as well as its work in continuing to streamline government approval processes.

Future prognosis for economic liberalization

Given the widespread perception that China’s progress on economic reforms has been somewhat adrift in the years since the Third Plenum, all eyes are now fixated on what direction Beijing’s economic stewardship will take after the 19th Party Congress. Will the beginning of Xi’s second term mark an inflection point at which the gradualist approach to reform suddenly breaks way before far more aggressive top-down action on restructuring the economy and mopping up its excesses? Or will Chinese authorities’ concerns about the risk of moving too boldly on reforms and triggering a sharp downturn keep their policies on economic liberalization confined to a slow, narrow path?

After Xi achieves what is expected to be a dramatic consolidation of his position at the Party Congress, one line of speculation contends that he will use his authority as China’s most powerful head-of-state in decades to break through the opposition that has held back reforms. However, another line of thought believes that his administration already holds the political capital necessary to move more quickly on reforms, citing Xi’s special stature indicated by his designation as the “core” of the Party last October and his role at the helm of many of the Party’s small leading groups.[9] Moreover, the huge results yielded by Xi’s anti-corruption campaign has demonstrated his administration’s ability to push through reform in an area that is far more sensitive than the economy.[10]

For now, the international business community will simply have to be patient and adopt a wait-and-see mentality. The biggest guidance about where the new leadership team will intend to steer the Chinese economy in the coming five years will likely emerge at the next Third Plenum in the fall of 2018.[11] There is strong precedent for the unveiling of major announcements on economic and political issues at China’s Third Plenums, such as the beginning of the “reform and opening” policies in 1978, the creation of a “socialist market economy” in 1993, and, of course, Xi’s blueprint for reform revealed in 2012.[12] As the first major political conclave of Xi’s second term, next year’s Third Plenum will be an event that all domestic and foreign companies should have on their radar. 

Rewriting China’s governance model

The Third Plenum’s reorganization of China’s governance superstructure was no less significant than its directives on economic reform, although the retooling of the roles of the Party and the state has received considerably less attention overseas than the Chinese leadership’s roadmap for economic liberalization. Most notably, the Third Plenum kicked off a dramatic expansion and empowerment of the system of “leading small groups,” the elite advisory panels that report to the Politburo and its Standing Committee, the supreme executive authority in China. This essentially shifted the center of gravity of decision-making on policy formulation and implementation away from the government bureaucracy and increasingly into the hands of the Party leadership.

In particular, the Decisions plan called for the establishment of two new high-level Party bodies responsible for overseeing national security and the economy, namely the National Security Commission and the Central Leading Group for Comprehensively Deepening Reforms, both of which are under Xi’s direct supervision. The first panel is tasked with improving coordination on both internal and external security matters, while the second is a steering body that holds the vast mandate of overseeing the reform agenda’s entire process – all the way from policy design to actual execution.

The Central Leading Group for Comprehensively Deepening Reforms is especially noteworthy for shifting decision-making on the economy, typically the province of the premiership and the State Council’s National Development and Reform Commission (NDRC), towards Xi and the Party-based leading small groups. The new arrangement on economic management was further cemented by the creation of a constellation of additional leading small groups tasked with implementing Beijing’s reform agenda at nearly all levels of the government hierarchy. In total, Xi now heads more than 10 Party bodies responsible for setting national policy in China, including at least five that he established or assumed stewardship of that his predecessors did not lead, exemplifying his hands-on approach to governance as well as the incredibly strong political standing that he managed to forge in his first term. 

Time to side-step the governmental machinery?

So why does the strengthening of the leading small groups system matter for international businesses operating in China? Put simply, the Third Plenum’s sweeping overhaul of governance has driven the emergence of a new lobbying environment for foreign companies by redrawing the boundaries of where the final decision-making takes place. When formulating their government affairs strategies, MNCs are now increasingly considering the need to go directly to the leading small groups rather than the State Council and the government agencies and ministries under its supervision, which have ceded some of their authorities to the more Party-centric framework.[13] In the years ahead, international businesses may well end up sidestepping the vast bureaucracy of the state apparatus more and more if they ultimately conclude that appealing directly to the leading small groups is the most effective route to improving operating conditions for their businesses in China and resolving their commercial issues.

A Party cleanse

From the earliest days of his tenure as China’s paramount leader, President Xi acknowledged how endemic official corruption was eroding public confidence in the legitimacy of Party rule and moved swiftly to launch what soon emerged as the most extensive corruption purge ever conducted in the history of the PRC. Intended to support the establishment of a more sustainable economic and political system, the massive internal clean-up has formed a pillar of the Xi administration’s reform agenda. It has indicated the leadership’s recognition that the success of its reform agenda will hinge to a large extent on its ability to stamp out corruption, especially given that the process of economic liberalization will likely open up opportunities for greater fraud.[14] In particular, it aims to send a clear signal that the leadership is determined to stop the benefits of China’s growth from accruing disproportionately to the official elites who taken advantage of their powerful positions for self-gain, most prominently in the state-owned sector.

Unprecedented in their scale and duration, the graft probes, spearheaded by anti-corruption tsar Wang Qishan, have felled many senior officials and executives since their inception in 2012. In total, the list of casualties now encompasses more than a million Party members who have been disciplined, ranging from the high-level “tigers” to the low-ranking “flies,” and the campaign still shows no signs of abating. At the National People’s Congress in March 2017, the leadership underlined the “irresistible momentum” that has gathered behind its vast clampdown and unveiled plans for a revamping of the state’s anti-corruption architecture that will house the powers of several anti-graft bodies under one roof, namely a new national supervisory commission scheduled to launch next spring.

With regard to its impact, the crackdown does appear to have yielded genuine progress in terms of discouraging illicit behavior within the ranks of Chinese officialdom given the dramatically escalated costs now associated with transgressions. It has also been speculated that the implementation of economic reforms will accelerate post-Party Congress since the new leadership team will be the first appointed since the launch of the anti-corruption campaign. As a result, they will have been carefully vetted and likely all have clean backgrounds, which would make them less concerned about being targeted by disciplinary investigations and possibly more willing to make bold moves on the reform front.

On the downside, however, the crackdown has fostered a culture of risk aversion across the Chinese bureaucracy, which seems to have often had a paralyzing effect on officials and SOE executives. Widespread uncertainty about what behavior is now permissible and what is unacceptable under the new regime has to a certain extent smothered the incentives to take risks and think outside the box. It has also resulted in delayed decision-making and approvals from individuals wary of making a mistake or becoming ensnared in a corruption investigation. Slower decision-making on new projects has in turn raised concerns about the crackdown having a dampening effect on Chinese growth.[15]

The upcoming debut of the new anti-corruption super-ministry at the beginning of President Xi’s second five-year term signals that the crackdown is set to persist as a permanent fixture of his time in office. Foreign companies will need to continue to exercise caution in their business dealings in China and ensure that they have strong compliance and preventative mechanisms in place. Furthermore, as Chinese officials continue to tread carefully in a highly scrutinized environment, international firms should be cognizant of the fact that decision-making processes regarding businesses deals may be slower than expected. However, while the anti-corruption drive may be undercutting the efficiency of China’s business environment in certain respects, it could eventually produce a more transparent system defined by closer adherence to the rule of law that would have positive implications for the operations of foreign companies in China.

[1] Clarissa Sebag-Montefiore, “The Chinese dream,” The New York Times, 03 May 2013.

[2] “Xi’s vision on deepening reform,” Xinhua, 23 February 2017.

[3] Chris Buckley, “Xi Jinping’s ‘Four Comprehensives’ give shape to a crowded agenda,” The New York Times, Sinosphere, 01 March 2015.

[4] “Wall in: China’s great dilemma,” Goldman Sachs, Investment Strategy Group, January 2016.

[5] “Wall in: China’s great dilemma,” Goldman Sachs, Investment Strategy Group, January 2016.

[6] Jane Cai, “Will China’s ‘core’ leader Xi Jinping now turn attention to economic reform?,” The South China Morning Post, 01 November 2016.

[7] Stephen S. Roach, “The temptations of a resilient China,” Project Syndicate, 27 March 2017.

[8] “China ahead of the 13th Five-Year Plan: competitiveness and market reform,” Prepared statement of Dr. Eswar S. Prasad, Hearing before the U.S.-China Economic and Security Review Commission, One Hundred Fourteenth Congress, First Session, 22 April 2015.

[9] Jane Cai, “Will China’s ‘core’ leader Xi Jinping now turn attention to economic reform?,” The South China Morning Post, 01 November 2016.

[10] Jane Cai, “Will China’s ‘core’ leader Xi Jinping now turn attention to economic reform?,” The South China Morning Post, 01 November 2016.

[11] “China’s 2017 Communist Party leadership structure and transition,” The U.S.-China Business Council (USCBC), June 2017.

[12] “China’s 2017 Communist Party leadership structure and transition,” The U.S.-China Business Council (USCBC), June 2017.

[13] “Multinationals are rethinking how they lobby Xi’s China,” Bloomberg, 14 March 2017.

[14] Robert D. Blackwill and Kurt M. Campbell, “Xi Jinping on the global stage,” The Council on Special Relations, Council Special Report No. 74, February 2016.

[15] Robert D. Blackwill and Kurt M. Campbell, “Xi Jinping on the global stage,” The Council on Special Relations, Council Special Report No. 74, February 2016.

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