China’s 19th Party Congress: Drawing a Line in the Sand

July 7th, 2017

By Davis Florick – Senior Fellow

In the fall of 2017, Xi Jinping will preside over a round of meetings that, in many ways, will be the culmination of his presidency. Every five years, China holds a party congress. During even years (2002 and 2012), a new president is selected. In odd years (2007 and 2017), the incumbent seeks to solidify his policies and begin the leadership transition for the next five years. This year’s congress is particularly intriguing given Xi Jinping’s significant reforms and personnel changes. His efforts to alter economic policy – transitioning it from investment-driven to consumption-driven – have required considerable leadership and determination. Likewise, Xi’s efforts to shift cultural and foreign policies have marked a noticeable transition from the Hu Jintao era which was largely characterized by a need for institutional consensus. The Xi Administration has presided over these policy changes while at the same time overseeing a major turnover throughout the Party and government. All the work that has gone into the last five years, and in some respects even longer, can be cemented with a successful 19th Party Congress.

Over the last few years, China’s economy has been subjected to significant challenges, thus encouraging the Xi Administration to explore and adopt a host of reforms. For instance, after the global economic downturn in 2008 and 2009, China’s gross domestic product (GDP) grew by 10.6% in 2010. Since then, growth has steadily fallen to 6.9% in 2015, 6.7% in 2016, and a projected 6.5% in 2017. Nevertheless, it is important to recognize the conditions under which the decline occurred. China is faced with hurdles ranging from an aging population, to rising labor and consumer costs, and a growing debt-to-GDP ratio: at 250% this time last year. Yet, 6.5% growth is still double or triple what most developed countries generate. Although many analysts have been disappointed by the totality of reforms taken by Xi Jinping in his first five years, what has occurred should not go without notice and includes the following:

• Foreign currency exchanges have become easier;
• The mortgage process has been simplified, thereby improving transparency and increasing the affordability of housing – simultaneously ebbing concerns over a housing crisis;
• Banks are being given more freedom in setting lending rates and relieving themselves of bad debt; and
• State owned enterprises are slowly being allowed to fail while executives are held accountable for those failures.

Although these initiatives have perhaps not gone far enough, it is important to recognize the difficulties the Xi Administration faces in taking reform too far, too fast. By taking a gradual yet steady approach to reforming the economy, the 19th Party Congress may present an opportunity for further, perhaps even more notable, changes.

Arguably more noticeable than Xi Jinping’s economic adjustments have been his efforts to address social and cultural obstacles. During his tenure, three changes reflect the gradual process of adjusting some of the Chinese Communist Party’s (CCP) longstanding policies. Moving from a one- to two-child policy, easing controls on transferring hukou status, and directing an anti-corruption campaign have led to significant reverberations through Chinese society. In many ways, the aforementioned steps were sorely needed to mitigate some of Beijing’s most debilitating challenges. Beyond addressing the issues that result from a declining population, reducing concerns over elder care, hundreds of millions of undocumented workers, and significant graft can all favorably impact the economy. At the same time, Xi Jinping’s policy decisions have not come without opposition. For instance, local and provincial governors in more rural parts of the country have lost valuable central government funds as their populations have been reassessed (and have been reduced) under hukou revisions. Likewise, the graft campaign has felled senior officials such as Zhou Yongkang, the former chief of public security, and General Xu Caihou, former deputy chairman of the General Military Commission. Although the inner workings of the Chinese government are difficult to sift through, these changes have undoubtedly left Xi Jinping with potential opponents. How the 19th Party Congress plays out could not only indicate the effect of his cultural reforms to date, but also shed light on whether Xi Jinping enjoys enough support to accelerate more changes over the next five years.

Perhaps the one area where the Xi Administration enjoys the broadest support is in foreign policy. Therefore, the 19th Party Congress will be less about securing Xi Jinping’s current positions and more about adjusting them. The one point of contention could be North Korea. During the Park Geun-hye administration, the South Korean leader met Xi Jinping on at least five occasions, which is in stark contrast to the zero meetings between Xi and Kim Jong-un. Perhaps most notably, during the 70^th Victory Parade Celebrations in Beijing to commemorate the end of World War Two, Park Geun-hye was front and center while the North Korean delegation was far off in a corner. Despite the troubles between Beijing and Seoul over the deployment of a Terminal High Altitude Area Defense system [THAAD] in South Korea, Pyongyang has not done itself any favors. Maybe the two most telling events were North Korea’s missile launch within hours of the Xi and Park meeting in Hangzhou in September 2016 and the assassination of Kim Jong-Nam month later. Given the tensions between China and North Korea and the embarrassing situations Kim has consistently put the Xi Administration in, it will be interesting to see if anything in Beijing’s stance changes with the 19th Party Congress. Certainly, this would be an ideal time to solidify any modifications for the next five years and beyond.

While there are many important policy decisions that will be made or finalized at the 19th  Party Congress, getting the right people there has been a testament to Xi Jinping’s planning and political quality. At the local and provincial level, elections and jostling for position are already underway to begin selecting attendees. To assist in moving this process along, since the start of 2016 Xi Jinping has appointed 20 of the 31 CCP provincial secretaries and 27 of the 31 provincial governors (deputies to the secretaries). By comparison, Hu Jintao only replaced 23 in total during the same period. These individuals play a key role in positioning delegates for the 2,000-strong Party Congress, and many of them will directly serve on the Party’s 350-member Central Committee. Given that the Politburo is drawn from the Central Committee, which will undergo an unusually high transition with 11 of its 25 members expected to retire, stacking the Central Committee is important. Moreover, five of the seven Politburo Standing Committee members are expected to retire, and these will be replaced by members from the new Politburo. Very quickly Xi Jinping’s Party turnover could solidify his stance in the CCP and that of his supporters.

The degree of change marked by the 19th Party Congress could quite possibly be the most important outcome from the meetings. Incremental reform, such as what occurred during the 2016 National Party Congress, will be considered a disappointment to some. Given the political machinations Xi Jinping has undertaken over the last five years and his efforts to build a support structure not seen since at least Deng Xiaoping, many observers have come to expect significant change. An outcome that features only modest reforms would be deflating. At the same time, there remain questions over what change might look like. Xi Jinping’s seeming willingness to adopt “red slogans” and reassess the historical record on Mao, the Cultural Revolution, and other topics could be a means to shore up his domestic support. Yet, if reforms carry similar themes, it would mean pulling back from liberalizing policies. Arguably most disconcerting are discussions in Beijing about the CCP’s retirement age, now 68. The possibility remains that Party leaders could use the 19th Party Congress and the next round of position appointments to dispense with the retirement age. Thus, Xi Jinping would be able to stay in office beyond the end of his ten-year term in 2022. Collectively, the impact of turnover within the Party has made the prospect of reform and the direction changes might take more intriguing and speculative than at any point in recent memory.

Over the next few months as the 19th Party Congress draws near, the Xi Administration and CCP may provide further clarity on the direction the meeting may take. Whether officials appear to entertain general or specific reforms will offer crucial indications regarding how the congress might unfold. At a minimum, as China continues to experience significant economic and demographic challenges, one would expect gradual reform to mitigate some of the most significant and immediate problems. Issues such as a potential housing bubble and bad debt being held by banks and other financial institutions will need to be managed continuously. Just as important are the longer run political shifts that the congress might signal. This is a pivotal time for Xi Jinping to secure his agenda not only for the next five years but for longer. The factionalism that has been drawn out during the last five years and best-represented by the anti-corruption campaign could well come back to haunt Xi Jinping and his disciples. But the 19th Party Congress is probably his best chance to place his supporters in the best positions to ensure the sustaining of his support base.

Image: the 18th Party Congress of 2012 (Source – Dong Fang)