Meet the New (Same as the Old) Boss
What to Watch for at the 20th Party Congress
In October, China’s Communist Party will unveil changes in its leadership—except at the very top. Xi Jinping is expected to receive a third five-year term as General Secretary of the Party, state President, and Chair of the Central Military Commission. That development alone will dominate coverage of the event, and be the focus of international reaction.
Other critical questions include:
- Does the makeup of the new leadership below Xi point to greater pushback against his policies or a consolidation of his authority?
- Will political priorities continue to dominate policymaking, or will newly appointed technocrats be able to shift the system to focus more on economic performance?
- Will these technocrats be able to change China’s highly restrictive approach to COVID-19 containment?
- Will changes in China’s foreign policy approach and relations with the West emerge once the Congress comes to an end?
For investors and corporates, the media narratives surrounding the 20th Party Congress will be just as important as the leadership changes themselves, as conservatism and continuity of leadership and policy under Xi will be seen as negative signals for markets and for China’s medium-term economic trajectory.
The Importance of the Public Narrative
The results of the 20th Party Congress of the Chinese Communist Party will be difficult for even informed observers to interpret. The Congress is not a policy event and new policies are unlikely to be announced, besides broad objectives for the Party detailed in an extensive five-year work report. Instead, the primary outcomes of the Congress will be the announcements of new members in the Communist Party’s Central Committee, Political Bureau, and Politburo Standing Committee. It is difficult to discern the individual policy preferences of individual Chinese leaders, if these can even be known. Factional alignments among these leaders are opaque and have not been as relevant in policy debates during the Xi Jinping era.
As a result of this ambiguity, the narratives that major media outlets develop around China’s leadership changes will be significant and are likely to influence both the reaction from foreign governments and financial markets. The most important decision coming out of the Congress will be the widely expected announcement of Xi Jinping’s third term as General Secretary of the Communist Party. Virtually every other appointment will be viewed through the lens of whether or not it points to a further consolidation of Xi’s authority within the Party, or pushback against Xi’s rule.
The fact that Xi was willing to travel abroad ahead of the Party Congress—he visited Kazakhstan and Uzbekistan in recent weeks—suggests that any challenge to his leadership at the top of the Party is not a serious threat. The formal announcement of Xi’s third term will cement the global narrative of a more authoritarian China that is distancing itself from the notion of collective leadership. The Chinese Communist Party may have been moving inexorably toward one-man rule over the past five years, but many analysts will conclude that Xi’s third term marks the arrival at that destination. This development will also mark a new era of uncertainty in Chinese politics, as the question of succession will emerge almost immediately after Xi’s reappointment, with questions about whether or not the 69-year-old leader’s third term will be followed by a fourth.
Financial markets are hoping for some evidence of internal resistance to Xi, given the arbitrary policymaking over the past three years that has created significant market volatility. But for market confidence to grow, there would need to be clear evidence that a new team of economic officials plans a different approach to shoring up a Chinese economy hit by strict COVID-19 containment measures, a property crisis, and in the longer term, formidable demographic challenges. A further consolidation of Xi’s authority, in contrast, would imply continuity in policy, and more importantly, continuity in the elevation of Party priorities above those of China’s economic technocrats. This could deepen investors’ concerns about regulatory overreach.
New Economic Leadership—What Changes?
While the Congress is not the place for major new economic policy announcements, it will have important implications for longer-term economic dynamics, as Politburo Standing Committee lineups tend to reveal preferences for China’s economic governance. The past ten years have seen increasing Party involvement in economic policymaking, less policy coordination and balancing of interests, and a marginalization of the State Council and economic technocrats. The Congress will offer key signals for whether these trends are likely to endure in the next five to ten years.
If they do, optimism will wane that Beijing can make the tough choices required to tackle structural headwinds to the economy—demographic changes, the property market contraction, financial sector instability, external pushback—and push the economy closer to potential growth. The drastic economic slowdown of 2022 was precipitated by COVID-19 lockdowns but driven by much deeper weaknesses in China’s economy, as well as a series of policy mistakes, including an attack on the private sector and an absence of meaningful consumer stimulus.
Some might argue that in cementing his authority over the Party, Xi will be in a better position to delegate power back to the technocrats. This could be true, but it is equally true that his empowerment of government agencies like the Cyberspace Administration of China (CAC) over the past two years (the agency which led the push to delist Didi Chuxing from overseas exchanges) will be hard to reverse. Decisions made over the past decade have created new interest groups that will be strong obstacles to reform. Their continued influence could produce more surprise regulatory actions, such as those taken again Internet platform companies, education and tutoring firms, and firms such as Didi.
Two nominations will be closely watched: Li Keqiang’s replacement as premier (and the possibility of Li taking up another high-level position, which would signal continued influence); and Liu He’s replacement as vice-premier in charge of finance and economics.
Realistic candidates to replace Li as premier include current Politburo Standing Committee member Wang Yang, Vice-Premier Hu Chunhua, and Executive Vice-Premier Han Zheng. The emergence of another surprise candidate is possible, though unlikely. Neither Wang nor Han would be viewed by markets as denoting a change in economic policy, given their identification with the current leadership—though Han’s inclination toward fiscal austerity, which may be negative for economic momentum in the short term, could be more favorable for the private sector in the long run. Because Hu Chunhua is seen as closer to former General Secretary Hu Jintao, his appointment as premier could be viewed as heralding a change in approach to economic policy. But for that to materialize, other officials that do not have close ties to Xi would need to be put in place.
The replacement for Liu He in the finance and economics post is arguably even more important for China’s medium-term economic trajectory, and current head of the banking regulator Guo Shuqing filling this spot would be the most positively received by Western observers and financial markets. The candidate generally seen as closest to Xi is He Lifeng, a former NDRC official and largely unknown to financial markets. If appointments like He’s produce a narrative that Xi is favoring loyalty over technocratic competence, this would be one of the strongest policy signals out of the Congress—and one that would be interpreted negatively for China’s economic outlook over the next five years.
Transitioning Away from Zero-COVID
The Party Congress itself is unlikely to be the venue for a shift away from China’s “zero-COVID” policy. The more important period to watch will be the two to three weeks after the conclusion of the Congress, when easing political pressure on Beijing and local officials could produce a different approach. As the Congress ends, and as other countries in the region continue to relax controls and travel restrictions, China risks appearing more and more isolated from the rest of the world.
International travel restrictions are likely to be the first to be lifted, ahead of the early Chinese New Year holiday in late January. The fact that Xi Jinping is already traveling abroad makes it more difficult for Beijing to maintain travel restrictions for Chinese citizens. But how domestic pandemic controls are eventually eased will be significant for economic momentum. A formal announcement for China’s exit from “zero COVID”, and a timeline for lifting restrictions, would be more beneficial for the economy than a slow and muddled easing—even if controls are not lifted right away. It would provide some sense of certainty for businesses and consumers, boosting investment and employment. However, it is more likely that the easing of controls will take place incrementally, led by local governments rolling back testing and other restrictions, without a “big bang” announcement from Beijing.
The wild card is the path of the virus itself. Either the COVID-19 restrictions that China has imposed so far have been effective in controlling the disease, or the number of cases has been suppressed by local reporting. Either way, trouble looms. China will inevitably face a significant COVID-19 outbreak when restrictions are eased. The only question is how soon it comes. Such an outbreak, regardless of when it occurs, will disrupt the economy, with many fewer people working and others
refraining from travel and spending given newfound caution about contracting the virus. Still, given the tendency of Chinese officials to favor the vague concept of “stability” ahead of major political events, the end of the Party Congress could bring something of a reprieve.
China’s Relations with the West
Another question surrounding the Party Congress is whether it will have a material impact on China’s souring relations with the US and Europe. The short answer is no. Xi’s trip to Central Asia and meeting with Vladimir Putin—despite an acknowledgement of concerns about Russia’s actions in Ukraine—showed that the anti-Western partnership between Beijing and Moscow, and its defense of the idea of regional spheres of influence, is here to stay. This has reinforced concerns that Beijing could use the same logic to assert its rights vis à vis Taiwan.
A third term for Xi would cement the idea in Washington and other Western capitals that China’s political and economic divergence from the West will continue—making deeper economic engagement increasingly difficult, including in green technology supply chains where China has an edge. Nominations of technocrats seen as somewhat distant from Xi’s personal networks could revive hopes for an embrace of limited reform, but promise fatigue is real. And any evidence of a hardening of Beijing’s policy toward Taiwan during the Congress would generate more discomfort in Washington and Brussels at a time when the US Congress is trying to advance the Taiwan Policy Act.
In short, continued multilateral cooperation to push back against China’s actions and policies in the economic, security, technology and human rights spheres should be expected in the highly likely event that Xi receives a third term. We expect the Biden administration to roll out new measures to control technology flows to China around the time of the Party Congress (see our latest note). In Europe, we can expect the development of further policy tools in the economic and human rights spheres aimed at China, a broader debate about dependencies, and steps toward closer engagement with Taiwan, particularly at the parliamentary level.
As China eases some of its pandemic restrictions, we will see more high-level visits to Beijing, including expected trips by Germany Chancellor Olaf Scholz and French President Emmanuel Macron in the coming months. But the political space for them to engage actively with Beijing will be limited by souring opinion at home, and increased concerns around China’s trajectory.