Xi has more power to change China's course than any leader since Deng Xiaoping © PA Images
Xi has more power to change China's course than any leader since Deng Xiaoping © PA Images

Xi Jinping has the power to reshape China, but will he?

27 September 2017

The world’s financiers check China’s economic statistics with the urgent, obsessive frequency of a chronic hypochondriac frantically checking for symptoms of phantom ailments.

The global fixation on China’s GDP growth means that, as the country prepares for the national Communist Party congress in Beijing next month, some significant shifts in economic policy are being ignored.

No one can accuse Xi Jinping, the 64-year-old general secretary of the Chinese Communist Party, of lacking ambition. His government’s latest five-year-plan, which covers 2016-2020, aims to create a health insurance system for the unemployed, end deforestation, monitor pollution in real time, digitalise supply chains, reform the military, renovate shantytowns, break up monopolies in such sectors as electricity, telecoms, transportation, petrol, natural gas and public services and, most audacious of all, to encourage a “positive culture in cyberspace”.

Yet two of the government’s most significant goals are not spelled out in the plan – the desire to reshape the country’s investment strategy outside China and to level the playing field between domestic and foreign firms within its borders.

The rhetoric about levelling the playing field will be greeted with skepticism by many Western businesses in China. Earlier this year, Leif Johannson, chairman of Ericsson, accused the Chinese government of flouting WTO rules and not granting foreign businesses the degree of market access its companies benefit from overseas.

Johansson is not a lone voice. A May 2017 study by the European Union Chamber of Commerce found that 80% of the 570 businesses consulted felt the government was limiting their access to markets to protect domestic firms.

Last year, Michael Strauss, Germany’s ambassador to China, gave an unusually undiplomatic interview about China’s economic policy saying that “despite repeated declarations of intent, there is no progress on market access, rather, market access is restricted further”.

Strauss specified the kind of barriers being erected: import certificates for every kind of food (not just the high-risk ones, like meat, as is standard international practice); tender rules in the railways sector that award Chinese bidders more points than foreign ones; and subsidies and targets that favour local manufacturers in the electric vehicle sector.

Despite the latest declarations of intent, will anything really change? Probably, but not quickly. Off the record, an investment banker in China told me that the government is serious about closing down inefficient state-owned enterprises and strengthening the regulation of certain sectors, such as chemicals, to stimulate competition.

Even private businesses are angry about unfair practices by state-owned companies. The risk is that their resentment could hamper the private sector investment needed to meet the government’s goals. There is some evidence that this – alongside rising wages and materials costs – is already having an impact. Private investment in China has grown by an average of 30% a year in the past decade. In the first eight months of 2016, it rose by just 2.1%.

The most compelling argument that the Chinese government will change its ways is that it is smart enough to recognise that it has no choice. Xi knows that the economy will be crucial when he is elected for a second five-year term of office in October.

Even a leader as patriotic as Xi recognises that China simply cannot transform the quality of the country’s goods and become a global leader in such strategic sectors as robotics and e-mobility without hefty foreign investment. This year, for the first time, many foreign CEOs are publicly expressing their discontent with what Strauss called a “one way street” in trade and some are, he suggested, reconsidering future investments.

The strategic shift is more blatant – and immediate – when it comes to China’s foreign investments. Headline-hitting acquisitions of football clubs and movie studios are passé. As the investment banker said: “If you want to build a bridge in Bangladesh, great. If you want to invest millions in something as risky as a football club, they may discourage you – or cancel the deal. The focus now is all about One Belt One Road. Officials are also worried about corporate debt: they don’t want companies that are already heavily leveraged making large risky investments.”

This strategy became ‘official’ when China’s National Development and Reform Commission and the State Council stated, at the end of August, that overseas investment in sex, gambling and core military technology was to be banned, while acquisitions in real estate, entertainment and sport would be “restricted”. Any deal in “restricted” sectors will be heavily scrutinised by Chinese regulators. The State Council even suggested that overseas acquisitions in sectors such as property threatened China’s “financial security”.

The government is so concerned about debt that it ordered the country’s banks not to lend to many of the foreign operations owned by the heavily leveraged group Dalian Wanda. In an enforced restructuring, Wanda then sold off $9bn of leisure and hotel assets.

Xi has more power to reshape China than any leader since Deng Xiaoping. He holds more offices than any of his predecessors – apart from being general secretary of the Communist Party, he is chair of the central military commission and officially known as one of the country’s “core leaders”, an ego-stroking designation that puts him on a par with Mao Zedong and Deng.

When the 2,300 Communist Party delegates meet in Beijing for the 19th National Congress on 18 October, China will, as usual, project an image of collective leadership. Don’t be fooled – as Jude Blanchette, a researcher into Chinese politics put it, “this is collective governance of one”.

The bottom line is that if Xi wants to level the playing field for Chinese and foreign businesses, he has the power to do so. But does he?

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