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Matthews Asia Snapshot

China's New Guard

Week of November 16, 2012

The Chinese Communist Party has selected a new leader. Actually, it has anointed a new leader that it already selected some time ago. We have known for at least a year that the new leader would be Xi Jinping, son of a reformist-minded early communist revolutionary, who held power in China’s southern state of Guangdong as it led China’s charge to create a market-based economy open to the rest of the world. Xi’s pedigree, therefore, is assumed to be pro-reformist.

However, China’s leadership changes are not as exciting as they used to be. For Xi’s elevation is unlikely to herald a new acceleration of either political or economic reform. It is likely, rather, to signal a careful continuation of current policy initiatives. Those initiatives include: creation of an international finance center in Shanghai; development of capital markets outside of the policy banks; and better pricing of risk capital across the economy. There is also an emphasis on reforming China’s cities from production centers to consumption centers; continuing to raise the productivity of China’s workers and increasing their disposable income. In addition, China seeks greater focus on service sectors and more investment in IT, and the development of some (slimmed down) versions of welfare state institutions such as health care, unemployment insurance and pension provision.

But none of this is particularly contentious within the party, in terms of broad policy strokes. The average 40-year old in China has seen standards of living more than triple since they were 30-years old. Prosperity has spread from the coastal provinces to more central regions of China. People are, by and large, content with the material advances made under the Communist Party over the last two decades. The party, too, is not as divided as it used to be. The old divides between left and right were between those who believed that the state should command and direct economic activity and those that believed in the dynamism of free markets. But that argument is largely over and China’s economy is less monolithic—the large state-owned enterprises account for one-third of economic activity today; small and medium enterprises, predominantly privately owned, account for 80% of urban employment and three-quarters of new product innovation. Consequently, China’s newly diverse economy is harder to centrally control. Nor do the old generational divides exist within the party—between the old, first generation revolutionaries and the modern technocrats; or, to put it another way, between the ideologues and the pragmatists. The upper levels of the party are far closer in terms of age, philosophy and approach than was the case 20 years ago.

To the extent that you will hear the phrase “Marxism” used by Xi and the new leadership group, that is really a code for central political control by the party and has less to do with the struggle between centrally planned or market-oriented economies. Indeed, this probably represents the greatest challenge for China’s leadership. At a time when people are optimistic about their own personal advancement through hard work, they nevertheless are concerned about the extent to which party cadres have been able to amass great fortunes, through what appears to many as privilege. (Witness the recent events surrounding former politician Bo Xilai.) And it is here that the interests of the party elite in general are not well-aligned with the rest of the population. Can the new leadership be more introspective? Can it shed more light on wealth accumulation among the political leaders of China? Greater transparency could be bad for the pocket books of China’s political elite—as Bloomberg News reported, the 70 richest delegates in China’s National People’s Congress have a collective net worth of US$89.8 billion, compared to the US$7.5 billion net worth of the U.S.’s top 660 officials. Will the natural inclination of elites toward self-preservation increasingly pit the party against middle-class demands for a more open, freer media and for advancement based on effort not position?

Robert Horrocks, PhD
Chief Investment Officer
Matthews International Capital Management, LLC

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