Market Analysis

A Look at China’s Political Process

China has shown a historical tendency to goose growth during party transition years. Here’s a look at why that’s unlikely to be a mere coincidence.

As 2011 closed and 2012 dawned, China’s leadership transition—“elections”—began, with new leadership expected to be announced in March. As we’ve written, there’s a historical tendency for China’s communist government to cool its centrally planned economy in the year prior to transition—and attempt to goose it during the transition year. But a look inside the dynamics of China’s “elections” and intraparty tensions can help shed light on why.

To be sure, China’s method of transitioning leadership differs greatly from processes existing in the West. Their elections aren’t so much citizens choosing between Republican or Democrat, Socialist or Green, etc. It’s a one-party nation, meaning choices are between communist and, well, communist. What’s more, it isn’t as though Chinese citizens actually turn out to the polls and directly vote for senior party leadership.

In theory, China’s government system is based on elections every five years at the provincial level. These locally elected officials then select the next rung of leaders, who select the next rung and so on—all the way to the top, culminating in the selection of the president and premier. (While this process may seem a version of bottom-up representation within the party, in practice, power flows the other direction.)

The president and premier are restricted to serving two consecutive five-year terms and are part of the nine-member Standing Committee. The Standing Committee is picked from the 24-member Politburo. If you’re not part of the Politburo, the highest you can get is the State Council—although most members of the Politburo also hold multiple ministry positions in the State Council.

Despite being a one-party system, there are many factions with different interests. Two seem to dominate, differentiated primarily by socioeconomic backgrounds. On the one side are the wealthy elite, hailing mostly from the wealthy coastal region (a large set from Shanghai). On the other side are politicians mostly from poorer backgrounds who’ve fought their way up on some form of merit.

The current president (Hu Jintao) and premier (Wen Jiabao) are from the group with poorer backgrounds. As such, they have attempted to emphasize closing the wealth gap between urban and rural populations (although this policy position takes a backseat to government stability—always important in non-democratic societies—tied to high growth and low inflation).The previous president, Jiang Zemin, was from the wealthy elite and focused on urban development. Prior to stepping down in 2003, Jiang packed the Politburo and Standing Committee with his allies, allowing him to continue to wield significant power despite no longer being president. Most of his allies were promoted from the Shanghai region, earning them the moniker, “The Shanghai Clique.” Jiang also holds significant sway among the wealthy elite of the younger generation, who are typically known as “princelings.”

Although the influence of Jiang and his group has weakened in recent years due to losing two seats on the Standing Committee (one from a death and one from a power play in 2006 by President Hu who removed the member), the group remains formidable and prevented President Hu from reshuffling the Politburo in 2009. The power struggle between the two groups can perhaps best be seen in the new president and premier expected to be announced next month.

The president-in-waiting is Xi Jinping. He comes from the wealthy elite and is considered a “princeling.” Xi is closely allied with former President Jiang—particularly Jiang’s Vice President Zeng Qinghong (who incidentally was passed over for the presidency when Hu ascended in 2003). Xi is known for advocating market liberalization. On the other side, the expected new premier, Li Keqiang, is considered a core ally of current President Hu—and advocates affordable housing and a strong welfare system.

Because China’s authoritative government isn’t one smoothly functioning organism, it’s actually much more fragile than it often appears. After all, the selection of president and premier could easily upset factions passed over for promotion. Maintaining control without a power struggle, therefore, typically requires careful management of the political and economic systems—helping explain China’s historical tendency to stimulate economic growth during transition years, after attempting to rein in inflation the year before. In our view, understanding this helps explain why China decelerated its economy in 2011 and appears set to reaccelerate in 2012.

Exhibit 1: Relative China GDP Growth: Annual—30-Year Trend, 1980-2010

Source: Thomson Reuters and Fisher Investments Research

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