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Society & Culture

Xi Dominates National People’s Congress

Mar 14 , 2018
  • Sara Hsu

    Assistant Professor of Economics, the State University of New York

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China’s National People’s Congress was held last week, with few surprises. Most of the reforms laid out are extensions of existing or previously announced policies, including supply-side structural reform, reduced barriers to foreign investment, promotion of innovation, and enhanced military spending. To generalize the aim of the reforms, the main goal is to reach a growth target of 6.5 percent while stabilizing financial risks. Dominating the congress, however, was a proceeding not contained in the work report: the removal of term limits from the nation’s constitution, and the elevation of President Xi Jinping to a virtual kingship.

No surprises

The reforms described in the work report are similar to those presented in recent years under Xi Jinping; they are conservative, stability-focused, and not overly market-based. So much attention has been paid to supply-side structural reform in recent years that it feels like an ancient policy, centering on making state owned enterprises more efficient, reducing overcapacity in major commodity producing industries, and deleveraging overburdened firms. Some success has been accomplished in these areas, although not enough. State owned enterprises remain less efficient than private firms, and it is not clear that changing the ownership to inject private capital is the best means to this end. Overcapacity among existing steel and coal factories has been reduced, but additional, new factories have come online at the same time. State owned firms remain overleveraged, and the debt overhang presents real challenges to generating growth. It is hoped that the new round of supply-side structural reforms will chip away further at these issues.

China’s reforms for 2018 include an ongoing effort to open up to foreign investment. Investment barriers in the services industry, including the telecom, health care, education and new-energy vehicle sectors, are poised to be lowered. Foreign ownership of particular financial sectors will also be expanded. This year, the negative list for foreign investment, previously restricted to free trade zones, will be expanded nationwide. This represents a deepening of existing policies, which have focused on opening up the services, manufacturing, and mining sectors to foreign investment and reducing the negative list in free trade zones.

Innovation is one area in which China is enjoying great success. The country has unleashed a massive amount of technological creativity and entrepreneurship, which is visible in the strides made in artificial intelligence, financial technology, and e-commerce. Reform targets for 2018 seek to improve policies that bring about innovation, allowing institutions to obtain resources necessary for the process. With creative energy and financial resources coming both from the government as well as from the people, innovation in China appears unstoppable at the moment.

Finally, China will continue to increase military spending this year by 8.1 percent, up from a 7 percent increase last year. Funds will go to modernize military equipment, strengthen armed forces, and improve military training. The change is not dramatic, but some experts have expressed concern over the renewed commitment to military spending and China’s increased presence in the South China Sea. China’s acquisition of new warships and stealth fighters and the construction of military shelters and airstrips around the Spratly Islands has raised a red flag for foreign observers. Despite the contentiousness of this budget line item, it is not out of line with China’s past policies.

King Xi

The most important aspect of the National People's Congress was the elimination of presidential term limits. This appears to have been accomplished specifically to allow Xi Jinping to remain in office indefinitely. Xi’s approach to the economy is therefore that much more important.

Xi's track record on economic reform has been modest, with more of a focus on stability and the state than on steering China's economy toward market mechanisms. While some sectors are gradually opening up to foreign investment, full-fledged reform, especially in the services sector, is unlikely. Notably, growth in traditional services sectors like real estate and retail declined or remained flat in 2017, while most of the service sector growth has been related to new areas, such as e-commerce.

Under Xi, the state has received a great amount of attention, both in terms of politics under the anti-corruption campaign, and economics in terms of state owned enterprise reform. Xi began his tenure by cracking down on corruption and punishing over 1.5 million officials. The next phase of the crackdown is expected to punish about five times as many government officials. The heavy-handed state intervention in the political and economic systems has not had an overwhelmingly positive impact on growth. The anti-corruption campaign has greatly reduced consumption of luxury goods, while focus on reform of state enterprises in particular sectors has diminished priorities regarding private firms and traditional service sectors.

The takeaway from the National People’s Congress is that President Xi will be in power for many years to come, and, in that time, China is unlikely to make any radical economic changes. With a focus on stability and the state, China looks set to remain on its current trajectory for the foreseeable future.

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