While the world focuses on the U.S. engaging in its third freedom of navigation operation in the last year, this time around near the Fiery Cross Reef in the Spratly Islands, our attention is focused on an article that appeared yesterday in the People’s Daily, the official paper of the Chinese Communist Party. The article is important for two reasons. The first is that it may indicate a large shift in China’s economic policies. The second is that it is the most tangible indicator yet of an emerging split between Chinese President Xi Jinping and Premier of the State Council Li Keqiang. They occupy the top two positions in China’s most powerful decision-making body, the Politburo Standing Committee.
In February, writing about the second collapse of the Chinese stock market in the last 12 months, fluctuations in the value of the yuan and the looming specter of shrinking foreign reserves and capital flight, we described China as living in a “new normal.” Yesterday’s People’s Daily article said the same thing about China’s economy. The unnamed “authoritative insider” interviewed for the article said that under China’s new normal, the government would have to enhance efficiency when allocating resources and take the initiative in forming new structures to help economically dynamic regions grow and more challenged industries and regions weather upcoming problems.
The news around China’s economy rises and falls with the release of various monthly statistics, the veracity of which we have come to doubt more and more. Chinese foreign exchange reserves rose for the second straight month in April, and recent statistics about modest consumer inflation were heralded by many as a positive sign. But China’s Cabinet today approved another round of stimulus measures meant to boost China’s struggling exports and encourage ever more bank lending.
The article was striking in part because of its sober assessment of the Chinese economy. The anonymous source said to pay no mind to the cacophony of economic signals: China, it said, is following an “L-shaped” path, with a steep drop in growth followed by a period of stagnation, for the next few years at least. The source pointed out many of the issues we have been tracking: bad loans, property bubbles, rising unemployment and imbalances between rich coastal provinces and struggling interior provinces. The “revelation” of these problems themselves is not new for those who have been reading Geopolitical Futures. But seeing confirmation of these trends laid out in one of the main mouthpieces of the Chinese Communist Party is remarkable.
Besides the plain talk about China’s economic problems, there lurks a deeper issue that may explain why the People’s Daily and its authoritative source were so forthright: the potential for a split between Xi and Li. Whispers of conflict between the two have circulated for years and intensified in January after what was seen as mismanagement by the China Securities Regulatory Commission right after China started 2016 with a stock market nosedive.
Those whispers intensified into outright suspicions when last month, Xi took aim at the Communist Youth League, a roughly 90-million-member strong organization in China which both Xi’s predecessor, Hu Jintao, and Li were members of in their youth. The body in charge of Xi’s anti-corruption purges, the Central Commission for Discipline Inspection, issued a harsh condemnation of the group for having lost its core ideological principles and for becoming rife with embezzlement and political horse trading.
Historically, China’s premier has been in charge of steering economic policy. Xi, however, has slowly been taking economic decisions away from the premier and the State Council, preferring to concentrate decision-making in hand-picked committees and sometimes even his own counsel. The source quoted in the People’s Daily did not just lay out China’s economic problems, but was also extremely critical of the debt-fueled growth that China has thus far used to try and steer its way out of the crisis.
To a certain extent, this criticism is unfair, because as we noted, the Cabinet today approved more stimulus measures – which in practical terms means pumping money into the system to stimulate growth. But this isn’t about fairness – it’s about politics. Xi is consolidating his political power. Xi, and whoever else he has appointed to make decisions about economic policy, cannot let China’s growth numbers plummet too far for fear of igniting dissatisfaction with a government that for over 30 years has staked its domestic legitimacy on making China richer. But Xi also cannot simply remove the premier, who is a far more powerful and well-known figure than any of the previous “princelings” (descendants of prominent and influential party officials) and “tigers” (senior officials) that Xi has taken down, like former commerce minister Bo Xilai and former security chief Zhou Yongkang.
Xi is looking ahead to the 19th Party Congress in 2017. These meetings, held every five years, decide who will occupy the top positions in China’s government. Li is arguably Xi’s biggest competitor, and Xi has systematically strengthened his hold over the Communist Party since he came to power in 2013. The article in the People’s Daily shows that Xi is even willing to admit the extent to which China’s economy is facing challenges unprecedented since Deng Xiaoping opened China’s economy to the world at the end of the 1970s. Xi will try to use this weakness and parlay it into strength by weakening a potential rival and lowering expectations.