China removed its high-profile, reformist finance minister from the post in a shuffle that comes as President Xi Jinping positions trusted allies in key roles and Beijing prioritizes short-term growth over major overhauls.
The shuffle put more senior government posts in the hands of Xi loyalists ahead of a twice-a-decade Communist Party Congress next fall that will shape policy for years to come.
Mr. Xi’s supporters say he still faces pockets of political resistance and needs to consolidate power further to enact meaningful economic restructuring in his second five-year term.
Within China’s political, academic and business elite, however, there are concerns that Mr. Xi is increasingly focused on hitting growth targets and suppressing dissent rather than restructuring the economy and tackling other urgent problems. The latest moves on Monday include a rare intervention in the politics of Hong Kong and a plan to boost coal power despite a pledge to battle China’s severe air pollution.
Lou Jiwei, the ousted finance minister, was an outspoken Communist Party veteran picked for the job for his competence rather than a close relationship with Mr. Xi in the early days of the Xi administration.
Shortly before his appointment in the spring of 2013, according to people with knowledge of the matter, Mr. Lou expressed a wish to Premier Li Keqiang to allow him to serve his full five-year term. Mr. Lou’s pitch, these people said, was that he had a plan to overhaul the country’s creaky fiscal system and tax code and needed time to carry it out. The chat with Mr. Li helped launch him as a major voice for market-oriented changes in China.
On Monday, with nearly two more years to go before his term ends, the 65-year-old Mr. Lou—weakened in part by his loss of Mr. Li’s backing and at odds with senior officials bent on sparing no effort to prop up the economy—was succeeded by a relatively low-profile bureaucrat.
“Lou Jiwei’s abrupt ouster sends a strong signal that any prospects of even limited economic reforms are falling prey to President Xi’s focus on consolidating his power,” said Eswar Prasad, a Cornell University professor and former China head of the International Monetary Fund.
Mr. Xi, despite his consolidation of power, still has to vie with departing and retired leaders seeking to promote their own favorites, party insiders say.
The shuffle announced Monday by the Standing Committee of the National People’s Congress, China’s legislature, also brought in new ministers of state security and civil affairs in moves that promoted Xi loyalists.
Minister of State Security Geng Huichang will be succeeded by Chen Wenqing. The appointment was expected after Mr. Chen was made party secretary of the ministry last year in what was seen as a move by Mr. Xi to strengthen his control over the security services.
Cai Qi, a close associate of Mr. Xi’s who was previously a senior official in the National Security Commission, was appointed mayor of Beijing last week and is now considered a front-runner for a seat on the 25-member Politburo next year.
Mr Lou is also one of the Chinese government’s most pugnacious and articulate voices on the international stage. He has publicly challenged Donald Trump’s trade policies and rejected criticism of China’s industrial policies by his US counterpart, Jack Lew.
In an exchange with Mr Lew in June over alleged market distortions blamed on cheap Chinese steel exports, Mr Lou argued that privately owned mills accounted for half of domestic output and did “not take direction” from the central government.
He has been equally blunt in domestic policy debates. In July he told a meeting of G20 finance ministers in Chengdu that the introduction of a property tax was the Chinese government’s “next task”.
This would be hugely unpopular with one of the Chinese Communist party’s most important constituencies — urban property owners — and has been experimented with in only a few cities, including Chongqing and Shanghai.
As recently as last week, Mr Lou said the government was “actively pursuing” property, income and environmental tax reforms.
Mr Lou’s focus on property tax reform was consistent with his larger concerns about the government’s future financial challenges, especially with a demographic crisis looming. The Chinese government has only recently moved to relax its decades-old “one-child” policy. One unintended consequence of the policy is a smaller workforce that will struggle to support a much larger retiree population.
…“Xiao is definitely one of Xi’s people but he could be seen as a co-ordinator between Xi and Li, having worked so closely with Li,” said a Beijing-based policy analyst who did not want to be named.
As I said yesterday, this has large implications for Australia’s terms of trade. As Xi Jinping morphs into the new Mao Zedong, a “Paramount Leader” increasingly likely to hold power beyond his allotted ten year tenure, what China needs and what Xi needs may no longer be the same thing. I have until now reckoned that the CCP under Xi considered reform a priority because the alternative path of debt-charged super growth risked crisis at some point and it was therefore an symmetric bet on retaining power. But if China has proven anything in the past eighteen months it is that it has the resources to continue down the Japanese-style stagnation path more or less indefinitely without such a crisis appearing.
Thus Xi may now reason that it is the path of reform, and the many losers that it creates, that is his and the CCP’s most obviously risky path in terms of retaining power.
So, today I am tossing up between a Xi that returns to reform-oriented policy after he stacks the Politburo at next year’s 18th National Congress of the Communist Party of China. And a Xi that deliberately takes China down a path of slow stagnation that he can rule relatively comfortably via increasing centralisation for as long as wishes.
The end result is the same for Australia’s terms of trade over a decade but the paths getting there are different given the commodity-intensity of Chinese growth will differ materially:
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
