Author: Not mentioned

Posted on: The Financial Times | March 19th, 2018


China has pushed through its biggest government restructuring since 1998, when then-premier Zhu Rongji set in train a wave of liberalising economic reforms. But the current re-organisation, which eliminates six ministries, two ministry-level agencies and seven vice-ministry level institutions, is intended not so much to liberalise as to tighten administrative control.

Control is the leitmotif of China’s “new era” under Xi Jinping, who at the weekend was unanimously reappointed to a second five-year term in office by the National People’s Congress (NPC). Other key roles have been filled with some of Mr Xi’s closest associates.

Wang Qishan, former head of Mr Xi’s anti-corruption campaign, was named vice-president and is expected to wield significant influence. In particular, he is likely to be called on to manage deteriorating relations with the US.

The balance of power within Donald Trump’s administration has shifted decisively towards “China hawks” such as Robert Lighthizer, US trade representative, and Peter Navarro, Trump’s trade adviser. The likelihood of heavy tariffs on Chinese goods and stiffening controls on Chinese acquisitions of US companies is growing. While Mr Wang, 69, boasts an extensive US contacts list and is seen as China’s top “American hand”, his ties tend to be with market liberals such as Hank Paulson, the Goldman Sachs veteran and former US Treasury secretary. He shares no natural affinity with men like Mr Navarro, the author of Death by China.

Nevertheless, a knowledge of US interest groups gained partly through leading China’s “strategic and economic dialogue” with the US during the 2008/09 financial crisis could lend sophistication to Mr Wang’s approach towards Washington. He will be assisted by Liu He, a Harvard-trained economist, who was appointed as vice-premier on Monday by the NPC.

Mr Liu, another of Mr Xi’s trusted lieutenants, assumes an unusually powerful portfolio which overshadows Li Keqiang, the premier. As well as taking day-to-day responsibility for ties with the US, Mr Liu is expected to head the new Financial Stability and Development Commission (FSDB), which is due to oversee all financial regulators.

Mr Liu’s promotion shows the value that Mr Xi places on reforms that enhance executive control rather than promote liberalisation. The two policies he championed during Mr Xi’s first term were “supply-side reform”, a euphemism for forcing factories to shut excess capacity, and “financial de-risking” or cracking down on arbitrage and shadow finance. His expected elevation to the FSDB means he is likely to oversee the work of Yi Gang, newly appointed governor of the People’s Bank of China, the central bank. Mr Yi, another US-trained economist, will be responsible for internationalising the renminbi and attracting greater foreign participation in China’s capital markets.

The emphasis on executive control is further evident in another big move: the establishment of a National Market Supervision and Administration Bureau. This is intended to resolve regulatory conflict by reducing overlap between key ministries in areas such as anti-monopoly and pricing.

The danger for Mr Xi’s China, though, is that tightening control will act like a tourniquet, restricting the entrepreneurial lifeblood that has driven the country forward during nearly four decades of reform. Beijing would be wise to recognise — both in its dealings with an intemperate White House and in the governance of its own economy — that concessions to the free market are often concessions that burnish your own development.

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