The Xi-Li Era: Transition in Two Phases

An abbreviated version of the author’s “China under Xi-Li,” China-US Focus, March 18, 2013

In the coming years, China can expect economic and financial reforms, international recalibration, and gradual political transition.

Unlike former president Hu Jintao and premier Wen Jiabao, Xi Jinping and Li Keqiang can no longer rely on double-digit growth, or China’s old growth model of investment plus exports. They must make do with slower but more sustained growth, even as they move China’s colossal economy toward the new growth model of consumption.

That, in turn, means a two-phase political transition, economic and financial reforms in the mainland, and recalibration in the region.

It takes two phases to transition

In November 2012, Western observers paid great attention to the failure of reformers Li Yuanchao and Wang Yang to make it to the politburo’s standing committee. They saw it as a sign that “conservatives” had won. In reality, China is moving toward liberal reforms, but such changes require tough hands and consensus leaders.

If Beijing had selected a reformist leadership (or a conservative leadership) that did not enjoy the support of the party as a whole, that would have divided the Party and the country. Instead, the Party opted for a de facto two-phase transition. The new Standing Committee comprises aging leaders that must retire after the next five years. During the National People’s Congress (NPC), both Li Yuanchao and Wang Yang took a step closer to the apex of power, along with a set of new-generation leaders.

Since the late 1990s, the vice-presidency has been a powerful position, the seat for an anointed successor. Since Li is not in the Standing Committee, his responsibilities will be more limited, but he will have a high-profile foreign policy post and he will play a key role in Hong Kong and Macau affairs.

Like Li, Wang Yang was passed over for promotion last year. He made his name in Guangdong, where he pushed for social and political reform. During the NPC, he became the youngest of the four vice-premiers who will assist Li Keqiang.

“We need to combine the dividends of reform, the potential of domestic demand and the vitality of creativity,” Li says, “so that these together will form new drivers of economic growth.” These objectives are predicated on economic and financial reforms and, thus, the return of Shanghai.

Green light for Shanghai’s financial reforms

Meeting with Shanghai’s delegation during the NPC, Xi Jinping urged Shanghai to push for bold liberalization and serve as a pacesetter in the impending reforms. It was the new leadership’s green light for accelerated reforms.

From the early 1990s to the early 2000s, Shanghai’s fortunes were boosted by a slate of new leaders, particularly president Jiang Zemin and his tough, hands-on Premier Zhu Rongji. In turn, local authorities initiated massive projects, even without the blessing of the central government.

During the Hu Jintao-Wen Jiabao era, efforts to accelerate economic reforms were more subdued due to the central government’s focus on balanced development. While Shanghai’s leaders supported the Hu-Wen goals, they saw reforms and growth as the prime instrument to bridge the divide. Nevertheless, the groundwork was laid for a new era of reforms in the Hu-Wen era.

As Shanghai’s party chief Chen Liangyu was dismissed for corruption in late 2006, Xi Jinping replaced Chen as party secretary in 2007. In turn, he was followed by Yu Zhengsheng, who is also in the Politburo’s Standing Committee. Like other reformers, Xi and Yu have welcomed greater scrutiny of public officials and the intensified anti-corruption struggle.

In March 2009, China’s State Council approved Shanghai’s plans to forge one of the world’s leading financial and shipping centers by 2020. Along with other major trading cities, Shanghai received the nod from the central government to use the renminbi in overseas trade settlements.

Financial reforms were initiated a year ago, while the internationalization of the renminbi has accelerated so fast that a convertible RMB could be less than a decade away – away.

Just two months ago, Yang Xion, the newly-elected mayor of Shanghai, officially unveiled the megacity’s plan to develop the mainland’s first free-trade zone, which is characterized as an effort to create a “mini-Hong Kong.”

Before the NPC, China’s securities regulator announced that, starting on April 1, China shall allow the residents of Hong Kong, Taiwan and Macau to open domestic accounts in the mainland. It is yet another move to support Shanghai’s Composite Index, which remains far from its potential.

These goals require a stable international environment. Consequently, in foreign policy, the tone of the new leadership is illustrated by the recalibration in Asia.

Asian recalibration

In part, Beijing’s recalibration is a response to the Obama administration’s pivot to Asia. It also reflects China’s rising strategic weight, the structural crises of the major advanced economies, and the shift of economic momentum to Asia.

The tone of the new administration’s foreign policy is reflected by a slate of new appointments, especially those of senior diplomats Yang Jiechi, Wang Yi, and Cui Tiankai. As these leaders and their capable teams move ahead, China’s foreign policy leadership will become more international, more professional and more open to new ideas.

After five years as foreign minister, Yang is now State Councilor. In this new role, the former ambassador to the U.S. shall focus more on grand strategies, in Asia and globally. When he left his post as foreign minister, he warned Tokyo to return to talks over territorial disputes or risk seeing tensions escalate. While Yang welcomes U.S. cooperation, he has urged Washington to respect China’s core interests.

After Yang, the Foreign Ministry will be led by Wang Yi, former ambassador to Japan (2004-7) and an expert on Taiwan. Thanks to Wang’s navigation, Sino-Japanese economic ties were sustained, despite tensions in the Koizumi era. Wang also paved the way for Shinzo Abe, Koizumi’s successor and Japan’s current prime minister, to visit Beijing and ease tensions half a decade ago. Furthermore, Wang has participated in the Six-Party Talks on North Korea’s nuclear program since its start in 2003.

Finally, Cui Tiankai, current vice foreign minister in charge of North American affairs who previously succeeded Wang as ambassador to Tokyo 2007-9), is a U.S. expert and China’s ambassador to Washington. In the past, Cui has suggested that China and the U.S. have a “trust deficit.”

Despite the stated U.S. concern over the “increasing power of the People’s Liberation Army,” General Chang Wanquan, who succeeded the retiring General Liang Guanglie, will be the only general in Premier Li’s new cabinet.

In the past, Chinese foreign ministers have been U.S. or Russia experts. Now, the emphasis is shifting back to the Asia-Pacific.

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In the next few months, Xi is likely to develop his signature policy platform. At the broadest level, these policies are likely to focus on structural reforms economically, continued inner-party democratization politically, an intensified struggle against corruption internally, and China’s rising global clout internationally.