China’s Cadres Face a Subdued Future

China’s two most important political bodies convene this week in a 10-day double conference, confronting a new and somewhat subdued world, with concern rising over the possibility of deflation, a slowing economy, a flagging property market and other issues.

The Chinese People’s Political Consultative Conference, the country’s top political advisory body, got underway today, on March 3. The Chinese National People’s Congress, the parliament, is to convene on March 5. There are considerably fewer members of each body, given the continuing harsh crackdown on corruption by President Xi Jinping that began shortly after Xi and his team took the reins in late 2012.

In the intervening period, fundamental changes have taken place. Prime Minister Li Keqiang has called on the country to adjust to what he calls “the new normality,” a formal farewell to the four-decade era of average double-digit growth that began in the 1970s.

On the political front, the crackdown on official corruption has gone on far longer and cut deeper than anyone expected at the time it began. Under the no-nonsense Wang Qishan’s assumption as chief of the CCP’s Central Commission for Disciplinary Inspection, both “small flies” and “big tigers” have fallen, notably including the notorious “Uncle Kang,” Zhou Yongkang, the former public security chief and onetime ally of the fallen Chongqing party chief Bo Xilai. Others are the former Vice Chairman of the CCP’s Central Military Commission Xu Caihou, and Ling Jihua, a former close aide to retired President Hu Jintao.

Wang has pledged that the campaign won’t stop there: “There is no ‘forbidden’ area in our anti-corruption drive,” he said. As evidence of his determination, he says he does not believe the saying that the CCP is unable to wipe out corruption.

The NPC and CPPCC are not off Wang’s radar and as a result, the hundreds of cadres traveling to Beijing for this year’s conclave are keeping an extremely low profile. Expensive cars are out, along with flashy jewelry. By a Reuters estimate, the corruption campaign has knocked as much as 0.4 of a percent off GDP. Revenues at the Macau gambling spa have fallen by 23 percent from the absence of local satraps coming over the border to surreptitiously risk public funds.

Literally thousands of low-ranking cadre have been sacked or arrested.

At least six more deputies will be absent this year as they are under probe for suspected corruption. Besides Ling, a CPPCC Vice Chairman, the other five are Su Rong, an NPC deputy and former CPPCC vice chairman; Bai Enpei, a senior NPC official and former Yunnan provincial party chief; Zhu Mingguo, a CPPCC member from Guangdong; Ma Jian, a CPPCC member and former Vice Minister of State Security; and Song Lin, a CPPCC member and former board chairman of state-owned China Resources. It was announced this week that 12 senior People’s Liberation Army generals have fallen.

Since the current-term NPC was formed in March 2013, 18 deputies have been kicked out. By comparison, the last NPC (2008-2013) sacked 18 deputies altogether in its five year term. The current CPPCC has also sacked 11 of its members. Ten are mainlanders who were fired for corruption.

In a major change that should have a significant effect on corruption, the Ministry of Commerce has released a draft law on foreign investment that will simplify regulations for foreign investors in housing and securities as foreign investment, and give all of them the so-called “national treatment,” viewing them legally as domestic investors. The draft law also greatly facilitates foreign investors to start businesses. But a major collateral benefit is that foreign investors will no longer need to seek pre-approval before start doing business.

If the draft law goes into effect as is, it will deprive government authorities of their powers and interests relating to foreign investment – and circumscribe their ability to demand backhanders. The draft is expected to meet heavy resistance during the meeting.

Coping with slowing growth

The 2015 GDP growth target remains a focus, with Li Keqiang expected to outline economic indicators such as inflation, investment and M2 money supply for the year. That will be a focus of attention abroad as well as domestically as the world’s second-biggest economy assumes greater importance in world consumption. On the domestic front, the general public is concerned with employment and the improvement of their livelihoods.

There have been enough leaks that it isn‘t going to be a surprise when Li sets 2015 annual GDP growth at 7 percent, the slowest since 1993 when the National Bureau of Statistics for the first time began to adopt GDP as the yardstick to measure economic growth. Until then the Bureau used Chinese-style gross national product (GNP) as the measurement.

Weaning the cadres away from the GDP yardstick is a campaign that has taken more than a decade. Since Deng Xiaoping opened the country to investment in the early 1970s, every local part official has measured his or her chances for advancement on meeting growth targets –often by fuzzing the figures.

In late January, the NBS released 2014 economic statistics indicating China’s economy grew by 7.4 percent last year, barely missing the 7.5 percent target set by Li last year. This was the second slowest GDP growth since 1993.

The slowdown is likely to continue this year. Beijing’s recent moves to cut interest rates and lower commercial banks’ required reserve ratios are quite telling. Thus it seems logical that Li will lower his sights in a bid to jawbone down expectations so as not to disappoint the citizenry later.

NBS statistics show 10.7 million new urban jobs were created in 2014, more than the 10 million target set by Li in his 2014 report. Disposable incomes increased 8 percent annually, outpacing GDP. The Consumer Price Index grew 2 percent, lower than the 3.5 percent target set by Li.

Xi and Li are demonstrably serious about boosting incomes. In mid-January, the State Council issued a circular on pay raises for the civil service. The rise appears staggering at first glance – from 60 percent to 100 percent increases. But given that this is the first pay increment for civil servants since 2006 and that the increment percentages are calculated based on their salaries, that figure may not be unreasonable.

In addition, base salary only accounts for 20-30 percent of civil servants’ real incomes, with the remainder from various subsidies. Hence, the pay raise increases civil servants’ real incomes from 12 percent to 30 percent, not overwhelming since it covers nine years. Strikingly, civil servants are to be given pay raises every one or two years from now on. In other words, pay increments for civil servants will become regular.

While China has more than 7 million government workers, more than 50 million in public institutions are also paid by the government. With the inclusion of retired state employees, more than 60 million people will benefit. Moreover, with the civil service taking the lead, the private sector is likely to follow in the competition for employees.

This is a promise the CCP must keep. The party has promised to double per capita incomes at the finish of the decade ending in 2020, and has pledged to ensure that people’s incomes outgrow GDP. That steady increase in per capita income is designed to help stimulate domestic consumption.

An online opinion poll by the state-run Xinhua News Agency indicates that boosting wage earners’ incomes and narrowing the wealth gap are the most popular aspirations for the current meeting, ranking above the crackdown on corruption, reform of the medical care and elderly care systems and environmental protection.

However, without a growing economy, the promise to boost incomes is empty talk and thus the commitment to double GDP by 2020. To achieve that goal, average annual growth must remain at about 7.2 percent. China can afford slower growth going forward because the past years have recorded higher growth rates. The goal can be reached if China has annual growth of ±7 percent for the remainder of the decade

With Li attaching this importance to employment, he is likely to set a goal of 10 million new urban jobs again for this year to keep unemployment below 5 percent.

While inflation appears to have eased dramatically, with CPI growth of only 2 percent in all of 2014 and having dropped sharply to 0.8 percent in January, to stay safe, Li is expected to set the CPI growth target at around 3 percent for this year.

Li has repeatedly ruled out any economic stimulus to boost growth. Hence monetary and fiscal policy are his main instruments for macroeconomic control and adjustment. Beijing has already sent clear signals that it expects to continue to use prudent monetary policy and a more aggressive proactive fiscal policy.

Under pressure over an economic downturn, the PBOC is expected to cut interest rates and especially the reserve requirement for banks, which stands at 19.5 percent, still the globe’s highest.

The PBOC’s official publication said on Feb. 26 that the central bank will cut interest rates and lower the reserve requirement at appropriate times to ensure adequate liquidity and prevent possible deflation.

In the absence of dramatic stimulus measures, Li is expected to set a deficit budget for 2015. The fiscal deficit for 2014 is planned at RMB1.35 trillion, with the deficit ratio expected at 2.1 percent. Given the heavier pressure of an economic downturn, many domestic economists expect the budgeted deficit for 2015 at RMB1.63-1.96 trillion, accounting for 2.5–3.0 percent of GDP, which is expected to reach RMB68.1 trn in 2015.

Ahead of the Beijing dual conference, Li told the State Council Feb. 25 “proactive fiscal policy must be strengthened to counter the pressure of the economic downturn.” The council also decided to make further cuts in the enterprise income tax for micro and small businesses and to reduce unemployment insurance fees paid by enterprises.

In 2014, investment in fixed assets was up 15.7 percent nominally and 15.1 percent in real terms. Investment growth is expected to be targeted at about 15 percent for this year.

Property Market Woes

With the property market downturn blamed for the slowdown, Li is unlikely to talk tough on housing market controls, a signal for local governments to ease their controls. In fact, many cities have already quietly revoked control measures.

Xi is also going all out to stress that major reforms must have legal grounds, to be pursued within the existing legal framework. So the party is bidding farewell to Deng Xiaoping-style reform and opening up, which in fact encouraged reforms to break the then socialist legal system. As part of what Xi called this new “Rule of Law,” Several new laws took effect at the beginning of this year, including new Budget and Environmental Protection Laws. The cadres will follow up fiscal reforms based on the Budget Law, such as merging businesses into the value-added tax (VAT) system.

SOE Reform

The CCP has made reform of State Owned Enterprises (SOEs) its goal. That includes turning SOEs into state-invested companies so as to separate ownership and management, and to turn state SOE ownership into mixed ownership by allowing private and foreign investors a stake. SOE management will be recruited publicly. Several large SOEs under the central government were assigned last year to pilot the reform. To legalize reform, the NPC will consider revising the existing Law on the State-Owned Assets of Enterprises which has been in effect since 2009.

This article was adapted from a study of the two-meeting conference by Reorient Securities Ltd. of Hong Kong