ECONOMIC POLICY IMPLICATIONS OF THE 17TH PARTY CONGRESS

C O N F I D E N T I A L SECTION 01 OF 05 BEIJING 006857 SIPDIS E.O. 12958: DECL: 10/26/2017 TAGS: ECON PGOV ETRD EFIN EINV PREL CH SUBJECT: ECONOMIC POLICY IMPLICATIONS OF THE 17TH PARTY CONGRESS REF: A. BEIJING 6777 B. BEIJING 6692 C. 06 BEIJING 4688 D. 06 BEIJING 4788 E. BEIJING 6609 F. BEIJING 6286 G. SHANGHAI 679 H. SHANGHAI 553 I. BEIJING 3895 Classified By: ECON M/C ROB LUKE; REASONS: 1.4 (B/D) SUMMARY -------------- ¶1. (C) The outcomes of the 17th Party Congress indicate agreement among China's top leaders that economic policy should continue to promote rapid growth but at the same time shift the forces behind that growth away from investment and towards domestic consumption. As such, future policies will likely grow out of the idea that China's continued economic rise should be fueled by a more efficient use of resources and greater respect for the environment. Incoming Politburo Standing Committee (PBSC) member Xi Jinping brings first-hand experiences managing impressive reform-fueled growth in China's richer and more export-oriented provinces. His new PBSC colleague Li Keqiang offers complementary credentials, having cut his teeth in more economically challenged provinces like Henan and Liaoning. The new 25-member Politburo lineup includes a broader array of economic talent that could make it easier for ministries and regulators to get a full airing for complex (and perhaps reform-oriented) policy proposals. In the run-up to the March 2008 National People's Congress, there should be extensive changes to government positions overseeing the economy. The most significant of these (for U.S. economic policy makers) would be the anticipated turnover of three Vice Premier jobs (including the one occupied by Wu Yi),as well as a possible change in who heads the People's Bank of China. The immediate short-term economic priorities of China's new government will be arresting inflation and addressing what is widely viewed as a potentially damaging bubble in the stock market (see septel). However, there is a strong case to be made that China's leaders will struggle to keep up with these challenges given the cautious and gradual approach towards reform imposed on those who rise in the system, central-provincial tensions over economic development goals (the provinces tend to push for more investment and jobs), and the incentive for new players at all levels to establish themselves as popular and effective rather than as "bearers of bad news." END SUMMARY 17TH PARTY CONGRESS RECAP -------------- ¶2. (C) The 17th Communist Party Congress (PC) ended October 21, followed immediately by the first plenary session of the new 17th Central Committee and announcement of China's new senior leadership lineup on October 22 (see Refs A and B). Party Congresses take place every five years and result in a new composition of the Party's top bodies, including the Central Committee (which now has 204 members),the Politburo (25 members) and, most importantly, the nine-member PBSC. Changes in these Party entities serve as the basis for personnel shifts in government positions in the ensuing months, culminating in the March 2008 session of the National People's Congress (NPC),the government's rubber-stamp parliament that, despite being the "highest organ of state power," in reality operates in accordance with direction from the Party. For example, precedent dictates that the departure of Madam Wu Yi from the Politburo will lead to her vacating her Vice Premier position by the March 2008 NPC session. We list at the end of this message the key shifts in the three party bodies that we believe will have the most impact on economic policies and/or lead to U.S. policy makers seeing a change in their interlocutors. SEEKING ROBUST YET RATIONAL GROWTH -------------- ¶3. (C) President Hu's speech early in the 17th PC (Ref B) emphasized continued economic growth, injecting more efficiency into that growth, a desire to ensure that all people benefit from China's increased wealth, and the need for China to have less dependence on exports and rely more on domestic consumption for future economic expansion. At one point, Hu referred to the role of "property income" in the economy, and the Chairman of the China Securities Regulatory Commission (CSRC),Shang Fulin, followed up by explaining to media that this implies Hu "will actively advance the healthy development of capital markets to allow a large number of investors to share in the economic boom fairly and equally." ¶4. (C) The Party also revised its constitution to insert Hu's "Scientific Development" concept -- the idea of pursuing more balanced development by having China continue its economic expansion in a manner mindful of the environment and that tilts away from energy- and labor-intensive sectors towards more advanced industries and services. This move reflects concerns about the current growth model, seen by many as unsustainable because it is focused largely on creating exports through low-end manufacturing, expanding industrial capacity through large investments in resource-intensive sectors (e.g., steel, cement),and marred by speculative property and infrastructure projects of debatable utility. THE RISE OF XI AND LI -------------- ¶5. (C) The addition of Shanghai Party Secretary Xi Jinping and Liaoning Party Secretary Li Keqiang to the PBSC brings two diverse and potentially complementary backgrounds to the top leadership. Xi, the apparent front-runner to succeed Hu Jintao in 2012, is the "princeling" son of Xi Zhongxun and reportedly was a "compromise" candidate for the PBSC, given his broad popularity and support within the Party and his apparent acceptability to Hu Jintao. His background has primarily been in prosperous provinces that have benefited from foreign trade and reform. Li, long viewed as a Hu Jintao protege and likely Hu's initial preference as his successor, by contrast, does not have Xi's pedigree. He has spent a significant part of his career is less economically fortunate parts of China such as Henan and Liaoning. Both Xi and Li have PhD's in economics. ¶6. (C) Last March (Ref C),Xi, at that time the Party Secretary of Zhejiang Province, told the Ambassador that he had asked Premier Wen Jiabao to support policies that would allow Zhejiang and other Eastern provinces to continue their rapid economic growth. This growth would provide the Central Government with tax revenue and development would then trickle down to less advanced areas in China's west and northeast. At that time, Xi was attentive to social security challenges, political reform, and efforts to fight corruption. He commented that in the East, "we are rich, but we cannot be unkind to the West...as long as the cake gets bigger, we all get richer." ¶7. (C) Xi's 17 years in Fujian coincided with an expansion of trade between that province and Taiwan. His more recent service as Party Secretary in Zhejiang and then Shanghai added to a resume that associates him with the promotion of wealth creation in China's more reform-oriented and internationally-focused economic areas. Tang Min, Deputy Secretary General of the China Development Research Foundation, suggested that Xi's economic "on the job training" will lead to his playing a positive, pro-reform role in future economic policy development. ¶8. (C) During a separate meeting last year with the Ambassador, Liaoning Party Secretary Li Keqiang candidly discussed economic development and stability challenges (Ref D). His top priority at that time was the revitalization of Liaoning's industrial base, with state-owned enterprise reform the most important task. Perhaps indicative of his attitude about foreign investment, Li referred to efforts (later successful) to attract an Intel plant to Liaoning and to the need to further develop neglected coastal areas. Li reportedly is sensitive to the challenges of working people, perhaps reflecting his years in the governments of less economically fortunate provinces of China (e.g., Henan, Liaoning). He is known as a competent administrator despite criticism from some quarters regarding the blood donor scandal in Henan several years ago that resulted in a large number of HIV cases there. One U.S. company representative active in raising awareness of HIV/AIDS in China was critical of Li's role in covering up that scandal. ANTICIPATED PERSONNEL CHANGES -------------- ¶9. (C) The Party Congress and subsequent first plenum of the new 17th Central Committee decided personnel changes only for Party positions, not for those government positions under the State Council. Nevertheless, because key members in the State Council come from the Politburo, the newly ascendant Politburo members are expected to be key players in government posts in charge of managing the economy. There is an echo chamber among our contacts and in media reports concerning certain rumors. First, the three key Vice Premier slots now occupied by the recently deceased Huang Ju, Wu Yi, and Zeng Peiyan will turn over, given that all three have vacated their posts on the Politburo. Li Keqiang is reportedly the favorite to replace Huang Ju as Executive Vice Premier, while the other two Vice Premier slots are likely to be occupied by Politburo Member and Guangdong Party Secretary Zhang Dejiang and new Politburo Member and Beijing Mayor Wang Qishan. (Most contacts suggest that Zhang will replace Wu Yi, with Wang replacing Zeng Peiyan, but a small number of contacts have this order reversed.) One contact who had claimed recent meetings with officials in the know said there is discussion of scrambling the portfolios currently associated with Zeng and Wu; this could have potential implications for determining who represents China at the Strategic Economic Dialogue (SED) in the future. ¶10. (C) Some other chatter of note: -- Mofcom Minister Bo Xilai rumored to become Chongqing Party Secretary -- Jilin Party Secretary Wang Min rumored to replace Mofcom Minister Bo Xilai -- PBOC Chairman Zhou Xiaochuan rumored to move to the Chinese Academy of Social Sciences and be replaced by CSRC Chairman Shang Fulin -- CSRC Chairman Shang Fulin rumored to be replaced by China Construction Bank Chairman Guo Shuqing -- Mofcom Vice Minister Ma Xiuhong rumored to become WTO Ambassador -- NDRC Chairman Ma Kai (who was not selected for Politburo membership) to be replaced by Vice Chairman Chen Deming -- No change to the position of Vice Premier Hui Liangyu We do not have any basis for judging these rumors but their consistency at least suggests several economic slots to watch in the upcoming reshuffles on the government side. Two contacts warned us this week that there is plenty of room for surprise in these personnel changes, both noting in particular that Zhou Xiaochuan's departure from the PBOC is not a given. As for the timing of these changes, they could happen at any time, though the most senior government posts, including the Vice Premier slots, will most likely not be changed until the March 2008 NPC session. ¶11. (C) Further concerning PBOC's Zhou: Song Guoqing, a professor at Beijing University's China Center for Economic Research, said that it does not really matter who replaces Zhou since all of the PBOC's most important decisions (e.g., exchange rate) actually are made at the State Council level. CDRF's Tang and Galaxy Securities Chief Economist Zuo Xiaolei echoed this, stating that the State Council makes many monetary policy decisions by consensus and then orders the PBOC to implement those policies. Song, Tang, and Zuo all agreed that Shang Fulin is Zhou's most likely successor. Tang cautioned, though, that whether talking about inflation, asset bubbles, or rapid growth, the government cannot completely rely on monetary policy to be the economy's "savior." IMPACT: QUALITY OF DIALOGUE -------------- ¶12. (C) CDRF's Tang and Galaxy's Zuo both suggested that having new economic blood in the Politburo will likely translate into a higher quality of dialogue between regulators, ministries, and the State Council. Numerous key figures in the top leadership have not until now had a strong grasp of China's complex economic challenges, let alone been able to follow and endorse proposed solutions, they added. This may very well change. In fact, there is such an increased understanding of economic issues among the Politburo members that the decision process could suffer from too much second-guessing, Zuo commented. INITIAL ECONOMIC CHALLENGES -------------- ¶13. (C) The new Politburo and those soon to be named to key State Council positions will have no time to waste before addressing several pressing economic challenges, most notably the rise in inflation and the widely perceived bubble in the stock market. Reflecting what we have heard from many contacts, Galaxy's Zuo told us that there is definitely a stock bubble, one that could expand much more before it bursts. The Shanghai index is at 6,000 now, up over 300% in the last two years. Unfortunately, as Zuo sees it, there is no incentive -- even after the 17th Party Congress -- for anyone to be the "bearer of bad news." HSBC China Economist Hongbin Qu believes popping the bubble now could drag growth down to 8 percent from 12 percent for a few quarters before a recovery to 10 percent, but sees this as preferable to waiting. ¶14. (C) Concerning inflation, CDRF's Tang believes food-related price shocks will subside in the coming months but is concerned that other factors will take over and make inflation a longer term challenge for China's leadership, including wage increases, the wealth effect of property and stock asset bubbles, and efforts by new local leaders to make a good impression by engaging in vanity infrastructure projects and pursuing crowd-pleasing measures like subsidizing public transportation. (Septel reports in detail on the challenges of the stock market rise and inflation.) IMPACT ON POLICY -------------- ¶15. (C) Most observers of the 17th PC -- both writing for media and talking directly with us -- do not expect sweeping changes to economic policy making. Typical among them is China Investment Capital Corporation Economist Ha Jiming, who expects China to promulgate "guideline" economic policies to set broad principles for economic development, a move that in his view does not signify significant changes in policy as much as a restatement of current direction. Such guidelines might include the promotion of energy conservation, improvement of resource allocation, correction of macroeconomic imbalances, improved pace of agricultural modernization, promotion of service sector development, and control of the expansion of heavy/chemical industries that are heavily polluting and energy intensive. Ha expects encouragement of higher value-added industry and the reining in of the development of lower-end manufacturing. Not surprisingly, he also anticipates further efforts to develop Central and Western China and attention to regulatory issues to bolster financial stability. COMMENT -------------- ¶16. (C) Despite the apparent lack of any bold initiatives coming out of the just-completed Party Congress, there is still room for some policy and personnel surprises in the months ahead. Efforts to extrapolate from the backgrounds and biographies of China's new leaders to suggest that China will see a future of continued cautious gradualism in reform with better functioning economic policy structures should be balanced against the fact that many of China's rising leaders, most notably Xi Jinping and Li Keqiang, have not had national-level responsibilities. We do not, for example, know precisely how these newcomers view reforms at the national level where broad income divisions and competing interests are at play, or exactly how they are likely to interact with foreign governments. Further, we have been cautioned by contacts not to assume that rumored personnel changes in government posts are done deals, especially with regard to the transfer of PBOC Chairman Zhou Xiaochuan. Also of note, the new line-up inherits a contradictory set of challenges: the coastal provinces are growing richer and there is now a desire to move towards cleaner, greener, innovation-based growth, yet the rest of the country has much catching up to do, and local leaders in those areas often see industrial expansion and massive infrastructure investments as the best way to go forward. END COMMENT. ADDENDUM: KEY PERSONNEL MOVES (ECONOMIC) -------------- ¶17. (C) Below are highlighted personnel changes with an impact on China's economy (see Ref A for further details): NEW TO POLITBURO STANDING COMMITTEE (PBSC, 9 MEMBERS) -- Xi Jinping -- Li Keqiang DEPARTURES FROM POLITBURO (25 MEMBERS) -- Wu Yi -- Zeng Peiyan NEW TO POLITBURO -- Xi Jinping -- Li Keqiang -- Beijing Mayor Wang Qishan -- Vice Premier Hui Liangyu -- Guangdong Party Chief Zhang Dejiang -- Mofcom Minister Bo Xilai -- (Note: NDRC Chairman Ma Kai was not/not selected) RETENTION OF FULL CENTRAL COMMITTEE MEMBERSHIP (204 MEMBERS) -- PBOC Chairman Zhou Xiaochuan -- SASAC Chairman Li Rongrong PROMOTION FROM ALTERNATE TO FULL CENTRAL COMMITTEE MEMBERSHIP -- CBRC Chairman Liu Mingkang -- CSRC Chairman Shang Fulin -- Minister of Finance Xie Xuren (newly appointed to MOF job) -- NDRC Vice Chairman Zhu Zhixin -- SAFE Chairman Hu Xiaolian -- CCB Chairman Guo Shuqing NEW FULL CENTRAL COMMITTEE MEMBERSHIP -- Deng Nan, Vice-Chairwoman of the China Association for Science and Technology (and a daughter of Deng Xiaoping) RETAINED ALTERNATE CENTRAL COMMITTEE MEMBERSHIP STATUS -- Zhu Yanfeng, President of China FAW Automotive -- Zhang Ruimin, President of Haier -- Jiang Jianqing, President of ICBC NEW ALTERNATES TO CC -- Lou Jiwei, President of the China Investment Corporation (new entity that is acquiring $200 billion in foreign exchange reserves to pursue higher returns) -- Wang Xiaochu, President of China Telecom -- Jiang Jiemin, President of PetroChina -- Xiang Junbo, President of the Agricultural Bank of China -- Xiao Gang, President of the Bank of China NEW SEATS ON CENTRAL COMMISSION FOR DISCIPLINE INSPECTION -- Fu Chengyu, Chairman of CNOOC -- Xie Fuzhan, Director, National Bureau of Statistics -- Wei Jiafu, President of COSCO Randt