Mao Zedong? Who’s he? As Xi Jinping makes modern China his own, becoming president for life, the question of who has his ear matters more than ever.
Since Xi grabbed the reins in late 2012, it’s been the reform-minded Zhou Xiaochuan, the long-serving People’s Bank of China head. The retiring Zhou is a disciple of economic disputer Zhu Rongji, who as premier from 1998 to 2003 shook the state sector like rarely before.
Zhu, long before that, was a protégé of Deng Xiaoping, who opened the economy in the 1970s and 1980s.
Governor Zhou heading for the exit was worry enough before news broke that Xi will retain power indefinitely. The central banker has been a consistent and credible voice for opening the capital account, increasing transparency and purging the worst excesses of shadow banking institutions, local governments and state-owned enterprises.
Beijing’s move to scrap the dollar peg in 2005 bore Zhou’s fingerprints. So did ending the cap on deposit rates and the yuan’s inclusion in the International Monetary Fund’s reserve-currency basket.
As Xi amasses absolute power with no accountability, the Zhou replacement decision takes on greater importance – and poses bigger risks.
All markets can do this week is hope the Communist Party – in essence, Xi – picks a talented replacement and he has Xi’s full attention. Bets appear to be centering on Xi advisor Liu He, a US-educated economist known for pro-market sensibilities.
Guo Shuqing, the chairman of the Banking Regulatory Commission, is another frontrunner.
It’s comforting that “reform” is Liu’s buzzword, something he stressed in Davos, Switzerland, in January. “Some measures will exceed the expectations of the international community,” Liu told World Economic Forum attendees. “Opening up is not only important for China, but also for the whole world.”
The question, though, is whether a Liu or a Guo PBOC will have the gravitas to play the honest broker role Zhou has for nearly 17 years. Not only is Zhou part of the Deng-Zhu continuum, but his tenure straddled three presidencies.
Jiang Zemin reigned when Zhou took the controls in 2002, followed by Hu Jintao and now Xi, who could rule longer than both predecessors combined.
Xi will need strong voices keeping his priorities on track. Power doesn’t just corrupt, it intoxicates and distracts. What advice Xi receives, from whom, and how it’s delivered, is of pivotal importance. That’s because China reaching developed-nation status smoothly and convincingly is not the fait accompli the conventional wisdom thinks.
True, investors betting against China don’t tend to make loads of money. But no industrializing economy has avoided a financial reckoning. Not Europe nor Japan nor Southeast Asia nor Latin America nor Africa nor the US.
Neither will China, whose debt-and-credit-reliant model will at some point experience a so-called “Minsky moment”, when excesses derail growth and stability.
That doesn’t necessarily mean a global, systemic meltdown. When China does stumble, it could just as easily take the form of an inward plunge while policymakers sort things out. The danger with China’s annual growth targets – 6.5% at the moment – is how they warp incentives.
Municipal government officials and party bigwigs focus all their energy on making the numbers, not recalibrating growth engines below the surface or raising productivity.
Xi has two overriding goals. One is reaching a per capita income of $10,000 by 2021. Two is morphing his 1.4 billion-person nation into a “fully developed” one by mid-century. Getting there requires consistently rapid growth, presenting Xi with a Catch 22.
Weaning the economy off excessive credit and debt means slower gross domestic product. Less GDP, though, makes Xi’s metrics harder to achieve. That’s why the path of least resistance – big growth numbers – wins out year after year.
As Xi’s party pumps up growth, protecting its legitimacy, the reforms needed to avoid a crash get short shrift. Take Wednesday’s news that Beijing is relaxing rules about how much banks must set aside to cover bad loans. It means the credit spigot is likely to stay open, exacerbating imbalances.
Such complacency dramatizes why Emperor Xi needs a strong and focused reformer keeping on a progressive path. Let’s hope Zhou’s replacement has the clout to do it – and has Xi’s ear.