Hopes high for Xi second term despite slow pace of China reform

Tom Mitchell
Chinese President Xi Jinping (2-L) speaks at the Great Hall of the People in Beijing, China, 22 February 2017.
Wu Hong | Getty Images

Lawmakers will gather in Beijing on Sunday for the last parliamentary session of President Xi Jinping's first term, with officials optimistic about China's economic outlook and downright bullish about the country's global standing after Donald Trump's first few weeks in office.

But while the time seems ripe for China to seize a greater role on the world stage, the turbulence caused by Mr Trump's arrival and the UK's decision to leave the EU has obscured an inconvenient truth. Beijing has yet to implement the hundreds of bold reforms promised by Mr Xi in 2013 on which its economic future depends. Among Chinese officials, the new mantra is "just wait for his second term".

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Widely recognised as China's most ambitious and powerful leader since Deng Xiaoping, Mr Xi has won plaudits for his graft purge and more muscular foreign policy. "His biggest achievement has been the elimination of political rivals through the anti-corruption campaign," says Zhang Lifan, a Beijing-based historian.

Accomplishments in the economic realm, especially the party's promise to give the market "a decisive role in resource allocation", are harder to identify.

National People's Congress is the AGM of China Inc.: Expert
National People's Congress is the AGM of China Inc.: Expert

"Economic reform has not been as fast as many of us expected," admits one Chinese official. However, he says the pace will pick up after Mr Xi has installed more of his lieutenants in key posts at the year-end party congress that will start the clock on his second term.

The personnel reshuffle is already under way. Liu Shiyu, head of China's security regulator since last year, has been championing a drive against speculative bubbles and market manipulation. The campaign's victims include one of China's richest men, Yao Zhenhua, who was recently handed a 10-year ban from the insurance sector.

On Thursday Guo Shuqing, a veteran reformer and newly appointed head of China's banking regulator, said one of his most important tasks for the year would be addressing systemic risks in the financial sector.

In private, some Chinese government officials argue that there has been slow but steady progress, on everything from interest rate liberalisation to grain procurement. One likens the reform process to a cacophonous Peking opera, which often seems to unfold at a glacial pace. "Every minute feels like an hour," the official says. "It feels like nothing is happening, but afterwards you realise a story was told."

Yi Xianrong, professor at Qingdao University, says interest rate liberalisation has been the most significant reform of Mr Xi's tenure, as it will help make "the entire financial system more market-driven".

In its most recent China Economic Update, published in 2015, the World Bank identified 27 "key reforms" the country had achieved, 20 of which were aimed at improving the allocation of capital.

Ulrich: Trump's speech positive for US-China relations
Ulrich: Trump's speech positive for US-China relations

But the World Bank report also noted the Chinese state retained control over almost 95 per cent of the banking sector, giving rise to "distorted incentives and poor governance structures".

As a result, state-owned enterprises continue to enjoy a disproportionate share of credit while privately owned businesses and foreign investors remain shut out of potentially lucrative sectors. As one senior foreign executive puts it, "we can see the promised land but we can't get anywhere close to it".

The Chinese government has also demonstrated over recent months that even hard-won reforms will be rolled back if financial and economic stability is deemed to be at risk. In its effort to stem the renminbi's rapid decline against the dollar in the second half of last year, China's foreign exchange regulator has reinstituted capital controls that had been relaxed years or even decades earlier.

These have included tighter scrutiny of money remitted by individuals for property purchases and by companies for multibillion-dollar acquisitions. But even dividend remittances and other items on China's current account, liberalised in the late 1990s, have been affected.

As with the Chinese government's stock market rescue in July 2015, this has raised doubts about the party's willingness to stick with difficult financial and economic reforms through turbulent periods.

"I hope the party congress is an inflection point in Xi Jinping's regime," says one person with close ties to the Chinese leadership. "He really needs to deliver over the next five years."

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