The Great Wall of Xi

by | Oct 24, 2017

Today Xi Jinping has cemented his status as China’s most powerful ruler since Mao Zedong, by having his name written into the communist party constitution.

As the communist party congress closed today in Beijing, President Xi began his second 5-year term as party general secretary, with more than 2,300 delegates from the party voting unanimously to include a reference to ‘Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’ in the enshrined document. This move means that any challenge to Mr Xi will now be viewed as a threat to communist party rule.

Many analysts predict that Xi will not appoint any officials young enough to be considered a guaranteed successor to himself as President, an unorthodox move that could set the stage for him to carry on as head of the communist party beyond 2022. Whatever his plans may be, his party officially recognizes him as the supreme leader, and having his name inside the most crucial party document will enable him to maintain influence for many years to come, even after he leaves office. Off the back of expectations that he would consolidate his position and authority, The Economist recently referred to Xi as the worlds most powerful man. Given that his words have been officially immortalized today, that title seems suitable.

64 year-old Jinping is known colloquially as China’s ‘Paramount Leader’. He gained influence and popularity by introducing broad reforms to the communist party, whilst initiating a major campaign against corruption within its ranks which saw many noted officials purged (removed from the party) at his behest.

As the son of famous communist revolutionary Xi Zhongxun (who is known for his push for economic liberalisation in China in the 80’s), Jinping has portrayed himself a champion of free trade and globalization.

We saw this in action just days before protectionist President Trump took office in the US in January, as President Xi graced the stage of the World Economic Forum’s annual gathering in Davos, Switzerland. It was the first appearance by a Chinese leader at the annual meeting of politicians, CEO’s and bankers ever. Xi spent much of his time at the podium denouncing protectionist policies and portraying China as the country which would remain outward looking as the US turned inward. In a broad swipe towards the incoming Republican leader, he said, “any attempt to cut off the flow of capital, technologies, products, industries and people between economies is simply not possible… Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air.” Naturally he was referring to Trumps more hostile views on global trade, but the tone of Xi’s talk was met with some scepticism and accusations of hypocrisy.

Critics were quick to add that though China has indeed embraced its own form of free-market capitalism, the government still makes it difficult for foreign firms to conduct business there.

So much so infact, that this year, the World Bank placed China at rank 127 out of 190 other countries in the ‘starting a business’ category on their ‘Doing Business’ world rankings, which ranks economies according to the ease with which foreigners can do business there.

China faired rather badly in other categories too, including the difficulty of acquiring construction permits, registering property, paying taxes and trading across borders, though these indicators are improving year-on-year.

There is also a widely held perception that local companies enjoy greater political protections as opposed to foreign businesses, which is not particularly encouraging for would-be entrepeneurs who seek to enter the Chinese market.

As such, despite President Xi’s portrayal of China as a bastion of economic liberalism and forward thinking, the most populous nation on earth has some way to go in terms of opening itself up.

However, whether China actually wants to give more space to foreign competition is up for debate. Given that the ruling communist party still engages in active censorship of the internet and other cultural spheres, this seems unlikely.

Local Chinese businesses such as Tencent and Alibaba have benefitted from the way the government has stifled international rivals by restricting their services within China, allowing local firms to thrive without external competition. Google, Facebook, Microsoft and other tech giants have faced market access issues in the country for years, due to the blocking or censoring of their digital content. To this day, the citizens of China are barred from accessing Facebook, Twitter, Snapchat, YouTube and Instagram amongst other popular Western social networks.

Thus, a paradox presents itself – that China has been opening itself up to global markets, while simultaneously cracking down on influences from other nations that could threaten the grip of the communist party itself. In this way, China may have lowered the trade barriers which allowed it to become the worlds largest exporter, but has raised the digital trade barriers that have kept foreign rivals locked out. It is a modern form of market protectionism which Trump could only hope to emulate with his ‘America first’ policies.

So for all Xi’s words, China has been cutting off the flow of technologies and industries, just as he condemned in his Davos address.

With this being said, President Xi did pledge during his 3-hour speech at the communist party conference that China would reduce entry barriers for other countries looking to do business with it. His main declaration was one of a ‘new era’ for China on the world stage in the years to come – the party’s way of saying this is the third chapter of modern China, which will include the objective of developing a ‘modernized’ economy.

Just as it took time for China to evolve from a largely agrarian society to an economic powerhouse, more time will probably be needed before it begins to implement Xi’s goals, especially considering it uses an unreformed political system.

Whatever the future may hold, the hope of many will be that China and the US may continue to grow in peace, despite their rivalry.

As one of the key engines of global economic growth, China has lifted more than 800 million people out of poverty, and has acted as the largest contributor to world growth since the financial crisis of 2008. Major policy adjustments will be required in order to make China’s growth sustainable and less dependent on debt (as warned by the IMF in August), but hopefully President Xi will be the leader to fix it.

 

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ALL RIGHTS RESERVED © INVSTR LTD. 2017

Risk Disclosure:
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