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Xi Jin-ping's next moves

On 8 October 2015, the Greater China Business committee hosted a lunch featuring guest speaker Dr Willy Lam, Adjunct Professor at Chinese University of Hong Kong. Lam gave a presentation about recent political and economic developments in China. According to Lam, the main purpose of Chinese President Xi Jin-ping's recent trip to the United States was to reassure US investors and policy-makers that China's economic reforms are on track.

Xi made one of the most important decisions of his life by leaving a comfortable position at the headquarters of the People's Liberation Army in 1982 to become a Chinese Communist Party (CCP) county secretary in rural Hebei. This move appears to have been prescient as nowadays it seems that so-called "grass-roots" experience is a pre-requisite for high office in China.

Xi is the most nationalistic Chinese leader since Mao Ze-dong, according to Lam. He has also managed to consolidate more power in the seven-member Politburo Standing Committee (PBSC) than his predecessor Hu Jin-tao. He has also developed somewhat of a personality cult with hordes of adoring fans, not unlike that enjoyed and fostered by Mao Ze-dong. The question now is whether, after solidifying his grip on power, he will really use this power and popular support to push forward reforms.

The latest iteration of the "Chinese Dream" (aspirational visions for China's future) mandates that China will have become a "moderately prosperous society" in 2021 (the centenary of the CCP's establishment) – and by 2049, centenary of the birth of the People's Republic of China (PRC), China will have closed the gap with the US in terms of economic and military power. Yet, according to Lam, Xi believes the realization of the Chinese dream is predicated upon the further expansion of the power of the Communist Party (CCP) and the suppression of dissent.

According to Lam, Xi wants to avoid what he believes were the errors made by Soviet leaders that led to the demise of the Communist Party of the Soviet Union (CPSU). Xi said soon after gaining power that the CPSU collapsed in 1991 because it failed to control the armed forces and the economy and that young leaders, such as Mikhail Gorbachev, abandoned the teachings of Lenin and Stalin. To avoid repeating the same mistakes, Xi believes it is imperative to keep strengthening the military, maintain control of the economy and never criticize Mao or the Mao era.

Xi appears to be using both hard and soft power to challenge the position of the United States. In terms of soft power, China is using economic and other inducements such Free Trade Agreements and loans from the Asian Infrastructure Investment Bank (AIIB) in order to buy support from its neighbours try to marginalize US influence in the Asia Pacific region.

According to Lam, Xi is walking a fine line between party-state control of the economy on the one hand, and economic liberalisation on the other. He expects, for the foreseeable future, Xi's administration will place emphasis on reforms such as the globalization of the renminbi (RMB) and Free Trade Zones (FTZs), which will not directly impinge upon the party's prerogatives.

However, Beijing is still relying on heavy state injections of funds to ensure a 7% GDP growth rate. According to some conspiracy theories, the irrational exuberance in the stock market since late 2014 is the result of deliberate state manipulation to boost stock prices of State-Owned Enterprises (SOEs), so that they could then sell shares at inflated prices and use the proceeds to repay debts. However, the extent of the sell-off made authorities nervous and they proceeded to adopt a number of dubious tactics such as injecting funds to prop up the market (US$200 billion, according to an estimate cited by Lam), preventing major stock brokers from selling stocks and punishing short-selling. The failure of these efforts has led to a questioning of the competency of the administration's economic management and could well lead Xi to slow down or even halt economic reforms.

The example of FTZs may be an indication of things to come. In 2013, authorities announced that 20 FTZs were to be established but only four have come to fruition so far. Moreover, the scale of the FTZs has not been impressive and reaction from the foreign business community has been lukewarm given that rules on doing business in FTZs are not very different from elsewhere in China. In addition, while Xi has announced that 80 major reform items were completed in 2014 and another 70 key reform programmes in 2015, these reforms have been mainly aimed at cutting red tape rather than market liberalisation.

Given Xi's desire to maintain control of the economy he is unlikely to allow more than token private or foreign ownership of SOEs in future, according to Lam. M&A consolidation of large SOEs (from 110 to around 60) is likely to be the extent of SOE reform efforts.

On foreign policy, China under Xi is increasing both soft and hard power efforts. The upgrading of military power and the building of artificial islands will continue as will soft power initiatives such overseas investments, the AIIB and the so-called One Belt One Road strategy (OBOR, Silk Road Economic Belt and the 21st-century Maritime Silk Road).

The AIIB is a direct challenge to Western counterparts. While there are already 57 AIIB members, China will control 26% of voting rights, which, given that major decisions require 75% approval, effectively gives Beijing veto power over AIIB decisions.

Moreover, the AIIB will serve Chinese interests well. Given that China-made infrastructure-related goods and services such as high-speed railways enjoy significant cost advantages, China stands to reap a bonanza of overseas orders. This is an ideal outlet for the glut of raw materials (such as steel and cement) and excess capacity in sectors including port construction, bridge-building, railways and highways. The AIIB will provide great impetus to the OBOR and the internationalization of the RMB, which is now the world's seventh most frequently traded currency since a large proportion of AIIB loans will be made in RMB.

The Silk Road Economic Belt (SREB) part of OBOR, which will include an oil pipeline to the Caspian Sea, will help China to increase its influence in Central Asia and serve as a catalyst to boost the economy of Western China.

However, the 21st Century Maritime Silk Road part of OBOR, aimed to link Asia and Africa by sea, while initially welcomed, has received some push-back by countries such as Sri Lanka and Bangladesh and India. Moreover, some development projects may not make economic sense and come with significant political risks, such as the China-Pakistan railway, to which China has pledged US$46 billion. According to Lam, the Xi administration has taken a big risk with this huge investment in what many regard as a failed state since much of the economic corridor falls within the province of Balochistan, where Baloch separatists are waging a civil war against the central government.

Lam concluded with a reference from a book by Michael Pillsbury which argued that the contest between China and the US need not be a zero-sum game. He said that trade and investment herald the possibilities of win-win scenarios and Xi Jin-ping's economics-based diplomacy could help Beijing defuse the "China threat" theory but only if the Xi leadership is willing to respect global norms, particularly in flashpoints such as the South China Sea and the East China Sea.

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