2017 Preview: A new red star over China – Part 1: China at home

2017 Preview: A new red star over China – Part 1: China at home

This is the first of a two-part analysis on what is in store for China in 2017. It explores China’s Catch-22 — the fact that it is integrating itself further into the global economy and becoming a ‘responsible stakeholder’ in multilateral institutions, while concurrently showing signs of turning inwards and becoming isolationist.

China’s domestic challenges will be foremost among Xi Jinping’s priorities for 2017. With the 19th National People’s Congress set to take place in November, 2017 will act as a stepping stone for 2018 when President Xi can push through his aims and objectives with minimal opposition in order to realise the ‘Chinese Century’.

The Legacy of the Party — Mao Zedong and Xi Jinping

In 1949, Mao Zedong advanced the principles of “starting anew,” “putting the house in order before inviting guests” and “leaning to one side” – effectively a blueprint for the newly formed People’s Republic of China’s international strategy. Mao contended that China needed to focus on its internal problems before looking outside its borders.

A decade prior to the founding of this new China, in 1937, American journalist Edgar Snow published a book entitled “Red Star Over China,” an account of Mao and the Communist Party of China (CCP) when they were still largely unknown in the West. The writing played an instrumental role in influencing Western and Chinese opinion in favour of Mao, and as revered American sinologist Stuart Schram noted in his 1966 biography of Mao, Snow’s work was “by far the most important single source regarding his [Mao’s] life,” offering important insights into the young Chairman’s own vision of China and the world.

80 years later and China has another leader, Xi Jinping. On top of his role as President, Commander-in-Chief, General Secretary of the ruling Communist Party and Chairman of the Central Military Commission, Xi consolidated total power in October 2016 when he took the title of “core” leader. Xi is the most powerful leader since Mao and his personality cult status will be at the epicentre of China’s prosperity throughout 2017.

China at home in 2017

2016 has been quite the year for Xi’s China at home. China eradicated its long-standing one child policy, ‘chief of the fire brigade’ Wang Qishan intensified his relentless anti-corruption campaign, the domestic stock markets experienced sustained turbulence – with two crashes in the first week of January alone – the yuan was added to the bucket of reserve currencies and the government launched a $30 billion venture capital fund to bolster innovation.

Collectively, the political trends at the end of 2016 showed signs of a tighter, more Party-dominated, personality cult-oriented, almost Neo-Maoist China reverting back into itself. Looking forward to the new year, the central foci for the CCP will be three-fold: maintaining the stability of the regime, therein reinforcing the legitimacy of the party to rule, the continuation of centralised policy-making and control to eradicate fragmentation, and efficient recalibration of the economy through meaningful reforms in a number of key sectors. China wants to be regionally dominant and as self-sufficient as possible, but is aware it relies on globalisation for economic growth which in turn translates into societal appeasement and reinforces the legitimacy of the CCP – and herein lies the paradox.

The eradication of elite-level factionalism

The most significant event for 2017 will be the 19th National Congress, due to happen in November. At this party conference, there will be a number of significant changes in party members at the upper most echelons of the CCP. One of the current rules in place is that members of the Politburo — China’s highest body — are required to retire at the age of 68. This rule will enable Xi to replace three significant Politburo Standing Committee members who are allies of former President Jiang Zemin. By doing so, Xi will strengthen his grip on power and effectively eradicate any remaining elite factions aiming for his downfall.

One individual will; however, not be held to this rule: Wang Qishan, the architect and unwavering head of China’s anti-corruption drive. He will be 67 come the Congress, but Xi is expected to issue an alternative decree surpassing these existing measures in order to keep Wang in his position. This will likely happen as Xi will find a ‘special arrangement’ according to a high-level source. One of the most significant consequences of this legislative change will be that Xi may then make himself an exception to the rule limiting presidents to two terms, thus enabling him to run for a third term. China could thus seek to replicate what it refers to as the “Putin model” in regard to a leader continuing to govern beyond existing parameters.

The crackdown on civil society

2016 also saw a continued crackdown on civil society in China. From foreign businesses to NGOs and human rights activists, one of Xi’s most relentless policies has been the suppression of civil society. As relevant today as it was when it was first issued in 2013, the Communist party still believes the very notion of civil society is “an attempt to dismantle the party’s social foundation.”

On top of the growing number of human rights lawyers who have been detained and imprisoned, of particular note for 2017 are a number of legislative changes aimed at suppressing the foreign press, which were pushed through in the run-up to the G20 Summit in Hangzhou in 2016. The legal changes effectively mean that foreign civic groups will have to submit to police registration and surveillance, limiting the freedom for non-Chinese media outlets within China.

As a result of confrontation between Chinese security and foreign journalists in the press, there have been on-going attempts by the Ministry of Foreign Affairs and Ministry of Education to train foreign journalists to ensure China is portrayed in a more benevolent light. A September report by PEN International highlights the growing crackdown on foreign journalists who “face more restrictions now than at any other time in recent history.” This state-sponsored muzzling is set to increase in 2017 as Xi’s grip on power tightens.

The question of Hong Kong

Human rights lawyers are not the only professionals to go missing, book sellers in the Special Administrative Region of Hong Kong have also been disappearing left, right, and centre. Following Beijing’s White Paper in 2014, which effectively stated that Hong Kong would be reverted back to the Mainland before 2047, the Special Administrative Region has been under threat.

Beijing have also co-opted the ‘democratic’ election due to take place to elect a new Chief Executive on 26 March 2017. Following new requirements endorsed by the Chinese National People’s Congress Standing Committee at the end of December, candidates running in the election will have to make a declaration to swear allegiance to China and uphold its constitution, as well as Hong Kong’s Basic Law.

It is a tense time for Hong Kong politics and its days as a gateway to China are numbered. Whatever the outcome, there is likely to be a backlash from Hong Kong’s population following elections in March. Moreover, with a number of businesses moving their financial investments to Singapore, the city might very well have seen its glory days.

China’s economic time-bomb

The entire China story of 2017 will be underpinned by the performance of its economy. One of the biggest challenges for the Xi administration will be the introduction and continuation of effective reforms to restructure the economy which depends on globalisation — a trend facing a backlash around the world. However, Xi’s proposed reforms thus far have been little more than rhetoric, and his cautious approach to the Chinese economy even culminated in the dismissal of reformist finance minister Lou Jiwei in November.

As a result next year will be a tough and important year for the Xi administration. China’s economy has been stabilised but at the expense of increased debt. China reiterated a growth target of 6.5% for 2017 at its Central Economic Work Conference and indeed much of this is based on a reliance on macro-stability. The balancing act the government is undertaken at the moment does not leave any margin for error. With the depreciation and internationalisation of the yuan leading to volatility in global currency markets, SOE mergers and reforms overdue, regulatory restrictions in property and lending markets requiring easing and a reliance of credit growth, China’s economy faces a number of unprecedented economic challenges for which there exist no quick fixes.

China’s inefficient credit usage remains a deep concern as liquidity still finds its home in failing SOEs. A real economic rebalancing will be expected to put genuine policies put in place. The three main drivers behind China’s economy in 2016 were strong fiscal spending, the bounce back of the property market and a more blasé approach to debt-to-GDP levels. Despite this, recent constraining policy initiatives aimed at cooling the property market will mean China will need to find an alternative engine in order to meet projected growth levels in the new year.

This light at the end of the tunnel for 2017 could be private-sector investment. With producer prices, margins and demand all on the rise, business confidence could be restored, leading to more investment incentives. Introducing private funds into more sectors dominated by SOEs, while better protecting property rights, improving the existing insurance system and steadily promoting fiscal reform, could enable China to meet its proposed growth levels for the year.

Technology, innovation and entrepreneurship

Another trend throughout 2017 will be China’s focus on technology and innovation. For the most part, China’s tech-industry giants have been hugely successful both at home and abroad. Tencent, Aliaba, DJI, and Didi have all delivered huge margins and take on their international competitors.

At the beginning of autumn 2016, the State Council issued a plan on transforming Beijing into a national scientific and technological innovation hub and announced a new $30 billion state-backed venture capital fund to be established in the southern city of Shenzhen. China aims to be the world leader leader in innovation, which will then act as a growth pole for the economy. Even Chinese Premier Li Keqiang has made a point of visiting startups and innovation hubs across the country and has encouraged entrepreneurship and innovation to be two of the main drivers of economic growth in the future. Li hopes this will help the country upgrade its industrial structure and create more jobs for the tens of millions of students graduating from colleges every year.

In November 2016 it was announced that China broke the patent application record in 2015. According to the World Intellectual Property Organisation (WIPO), more than 2.9 million invention patent applications were filed worldwide. China’s domestic patent office — the Property Office of the People’s Republic of China (SIPO) — received over 1.1 million of those filings. These included both filings from residents of China and those from overseas innovators who had sought local protection for their ideas.

Finally, there has also been a boom in financial-technology (fintech) in China. An annual study by KPMG and investment company H2 Ventures shows that four of the top five global innovators in financial technology now come from China. The list was topped by Ant Financial Services Group, formerly Alipay, which raised more than $4.5 billion in a record fintech private placement. With Brexit damaging London’s traditional dominance, the Chinese are keen to use next year as an opportunity to boost their reputation. A McKinsey report contests this is only set to increase due to China’s openly supportive regulatory environment, a highly developed e-commerce sector, enormous latent demand for inclusive finance, and the strong profitability of traditional banks.

Given the size of China’s internet finance sectors, which is dominated by the payments sectors, coupled with the surge in peer-to-peer (P2P) or marketplace lenders over the past decade, fintech in China could very well be a saving grace for the PRC in 2017.

Military and defence

China’s military will also undergo significant changes during 2017. Military reform in recent times has been remarkable and there have been a number of marked changes in culture, command, technology and size throughout the year. China has effectively solidified itself as the world’s second most power military force, excluding Russia’s superior nuclear arsenal. This, coupled with Xi extending his authority over the People’s Liberation Army (PLA) by announcing himself as Commander-in-Chief of the Joint Operations Command Centre in April 2016, marks a centralisation of military power — something which has unnerved Beijing’s neighbours.

The establishment of military bases in the South China Sea and the ‘salami’ and ‘cabbage’ strategies undertaken by Xi have proven successful. Furthermore, China’s willingness to confront the U.S navy over the islands it claims is certainly testament to the fact that China is now a serious military power.

These realities have become possible through a number of reforms which have reshaped China’s military. Firstly, there has been a re-centralisation of military power away from PLA leaders who were becoming an increasingly important actor in foreign policy. Xi’s campaign of political cleansing includes an indoctrination effort which all military personnel will encounter in the coming months. Xi has also taken away the authority of the military chiefs to established a Battle Command Centre where the Central Military Commission will have authority over the PLA’s combat operations.

Secondly, military hierarchy has been restructured. Conventionally in China, land forces received the majority of the resources and the maritime and air forces took second place. However, with China’s shift towards the seas and the skies, Xi effectively levelled the playing field and the new organisational structure is such that there is now a joint command between the forces headed by the President.

Finally, the meeting of minds between scientists and military strategists — in order to upgrade the PRC’s defence and develop new weapons — has been accelerating. The research and development agenda for China’s military is vast and although financing is still an issue, as the newest annual national defence spending report issued by the IHS Jane’s Defence Week predicted, China’s national defence budget will surpass the total of all Asia-Pacific countries except for the United States by 2025.

Domiciliary precedence

Beyond the plethora of domestic issues the Xi administration is currently dealing with, China still needs to tackle a number of cyber-security concerns, continue the success of its national space program, and deal with increased domestic security worries as a result of OBOR — including increased terrorist activity in its Western regions, exacerbated by Xi’s crackdown on Uyghur communities.

Despite worries associated with a more centralised administration with an increasingly vigilant leader at the reigns, investors should remain confident about the Chinese economy, largely because engines of growth can still be utilised and because it has an incredible propensity to maintain high growth rates even in the face of adversity.

Xi’s rise to stardom over the course of the year may only just be beginning and despite a potentially risky domestic outlook for 2017 characterised by uncertainty, with political reforms cemented, military reform taking shape, and economic reform in the pipeline, any serious danger to the stability of the party-state should be effectively mitigated. The stage is set for China to set its international agenda.

About Author

James Tunningley

James Tunningley is a GRI Associate Analyst. He is the Director of the Young China Watchers in London having previously held positions at the Royal United Services Institute for Defence and Security Studies and the China-Britain Business Council. He is on the Young Leaders Program at the Center for Strategic and International Studies Pacific Forum, a Fellow at the Royal Asiatic Society and a Junior Member of the Royal Society for Asian Affairs. He is a graduate of the University of Oxford.