All the president's men, and the plans for China's reform

Q&A: Brookings Institution's Cheng Li

All the president's men, and the plans for China's reform

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President Xi Jinping is often called the most powerful Chinese leader since iconic reformer Deng Xiaoping. But most people outside Beijing’s inner circle have no way of knowing just how much power Xi and his team wield, and how their stated agenda for economic reform will actually play out. In this interview with China Economic Review, Cheng Li, recently named director of the John L Thornton China Center at the Brookings Institution, a Washington-based think tank, takes a cautiously optimistic view of the nation's leadership.

Li grew up in Shanghai during the Cultural Revolution and joined Brookings in 2006, where he follows China's development and the inner workings of elite Communist politics. Li defends his optimism on the reform of the Chinese economy and discusses how Xi has surrounded himself with people with backgrounds in arts and humanities and the sciences, whereas previous leaders promoted mainly engineers.

China is at a crucial juncture right now, with President Xi Jinping and his team starting on a new phase of economic reform. Why are you optimistic about the Chinese leadership's ability to successfully navigate this and rebalance the economy, while avoiding a major crisis?

Well, my optimism is not based on the political naivete or the wishful thinking, but rather I am fully aware of the challenges the leadership faces. Because of these challenges, they should do something big, bold and broad before it's too late. Xi Jinping is particularly good at the economic policy changes, and particularly market reform, based on his previous experience, and his work in Fujian, Zhejiang, and Shanghai. And also that he has been widely seen as economically liberal, politically conservative. Many of his senior colleagues are also pretty good, well-tested in terms of economic policies.

If you look at the Politburo Standing Committee, and especially those people who are close with him, they all have the very solid leadership experience in coastal regions – these are the economically well-developed regions. And also, they are further surrounded by a group of very talented financial or economic technocrats.  If they cannot present a sophisticated economic policy, you probably cannot expect anyone else can.

Most importantly, we should look at the political reason behind these economic policies. The reform agenda not only has the specific policy or objective, but also has a clear timetable. For example, Shanghai Free-Trade Zone experiment – three years. Interest liberalization – three years. And some of the 300 policies have already been implemented. And many of them will be delivered within a three-year time frame. Why three years? Because in three years, China will have another important political succession. The current seven members of Politburo, including five of Xi Jinping's political allies in the Politburo Standing Committee, will retire. Only Xi Jinping and Premier Li Keqiang will stay for a second term. So he needs to show he's delivered his new economic policy and with a certain degree of achievement or success. He can really start his second term with a consolidation of power, appoint more political allies to important leadership positions. So that's the timetable. That's the political incentive to do so.

Now, the bottom line is the previous model of economic growth, which is export-led, with heavy negative environmental consequences, and especially with so-called cheap labor – that development model is coming to an end. So you need to promote so-called innovation-driven economy, but with innovation-driven economy, you need to promote the market, because the monopoly, if the Chinese economy continues to go with the previous model, there's no inventive for innovation. So that's coming to end. So you need to really promote the market force. Promote the service sector. More emphasize on rule of law. So this is exactly what Xi Jinping has been doing. So with all these reasons, I'm optimistic.

People are talking about how Xi already has amassed a lot more power than his two predecessors. Do you think that's the case? And if so, what implications does that have for economic reform, and what are the possible risks?

I want to avoid a simplistic approach. On the surface, you do see Xi Jinping consolidating his power very quickly. He holds five top positions, especially the party, the army, the government. But on the other hand, if you're really a strong man, you don't need these positions. For example, Deng Xiaoping, in the final years of his tenure, he did not have any leadership positions. He only held one position which is Honorable Chair of the Bridge Association. Now also, you can argue that Xi Jinping's power comes mainly from six versus one majority in the Politburo Standing Committee. This is the view I share. So in that regard, we need to be a little bit cautious to jump to the conclusion that Xi Jinping is already a very strongman leadership. What is clear is that his leadership style, his personality, already make a huge difference. He's bold, spontaneous, and no-nonsense, and quite popular. So in that regard he differs from Jiang Zemin and Hu Jintao. He certainly is more popular than Jiang Zemin, but he is more spontaneous, bolder than Hu Jintao.

Regarding technocratic leadership, Xi is surrounding himself with economic and financial experts; six of the seven current members of the Politburo Standing Committee have backgrounds in social sciences and humanities, rather than engineering. What are the implications of that?

Usually when we define technocrats, we should define three things. One is that the person has an engineering degree, and the practice as an engineer, and serves on the leadership position. So in that regard, it's true, there's only one person, Yu Zhengsheng [Chairman of the CPPCC National Committee], meets that criteria. But 10 years ago it's a different story. All nine members of the Politburo Standing Committee are technocrats. So that's a dramatic change within one generation.

I think that there's a linkage or correlation between what kind of leaders run the country and what kind of main policy agenda that the country pursues. In many democracies, I think those trained in law become elite. The norm is that if you have a leadership [with] legal training, by and large that's a good thing, not a bad thing, particularly in China. In that regard, I think you can expect they will more emphasize on rule of law or even, eventually, constitutionalism.

Now, this also contrasts to the past two or three decades and the rule of technocrats. China [was] really in the construction fever. That era is coming to end. This is what Xi Jinping said, we should have quality growth, more balanced development, more emphasis on equality, social cohesion. So, if that's the case, this reflects [that] the technocratic mentality also coming to end.

One of the biggest challenges that China faces right now in terms of economic reform is reining in the state-owned enterprise sector. Do you think the Chinese leadership has a credible plan?

Xi Jinping and Wang Qishan [Secretary of the Central Commission for Discipline Inspection] are in a better position [than their predecessors] to persuade the state-owned enterprises to surrender some of their power. For example, they should pay 30% of their revenue to the state. Probably 80% or 90% of the business the state-owned companies [currently] monopolize will gradually open to competition. These are all important changes. You see the heads of SOEs in jail, the ministry of railroad already dismantled. You see this very comprehensive investigation going on in state-monopolized industries, such as oil, telecommunication and electricity. Change is on the way, changes are happening.

Now, of course there's some danger. I would say the real obstacles probably won't come from state-owned enterprises, but from local government. The tax reform between central and local government [is a] very difficult issue. That's why you need to establish the economic reform or comprehensive reform leading group to negotiate, to monitor, to promote these changes. That's why you also establish the similar leading group in the local levels. So that I think is probably the most important.

But on the other hand, for example financial liberalization, you don't need to go though the local government. The interest rate liberalization, the RMB internationalization or convertibility, you do not need the local government approval.

What reforms or changes could happen in the Chinese economy that would be positive for foreign businesses?

Well I think in some areas you should not expect China's current wave of reform or liberalization will be similar to 1990s. In certain area, the competition will become very, very intense. But at the same time, in certain other areas, I think that the investment opportunity, collaboration, just start to emerge. This is including financial sector, including public health, education, tourism and logistics and all kinds of service sector. And finally what the Chinese talk about the green consumption, with the terrible situation of pollution and the environmental degradation.