China: Xi consolidates unprecedented power amid fears of a trade war
President Xi Jinping took a decisive step to becoming the most powerful Chinese leader in decades following the National People’s Congress’ (NPC) decision to scrap the two-term presidential limit from the constitution on 11 March. The NPC meeting, which ran from 5 to 20 March, also unveiled the economic targets for the year, which are broadly unchanged from last year’s goals, and disclosed further economic reforms. Moreover, the congress this year was partially overshadowed by fears of a global trade war following U.S. President Donald Trump’s decision to impose tariffs on steel and aluminum imports on 1 March.
Xi will have now the chance to continue with the implementation of his “New Era” for China beyond 2023, when his second term ends. His vision includes deep economic reforms and a greater role for market forces in the economy, but always under the control of the Communist Party of China (CPC). Xi will continue to strengthen China’s presence outside the country’s borders through, for example, the One Belt One Road initiative, and seek a more prominent role in the global political arena. The strengthening of China’s military capabilities will remain among Xi’s top political priorities. On the downside, the promotion of Xi as China’s undisputed paramount leader could fuel political infighting within the party in the long-run. The two-term limit had been China’s main institutional mechanism to ensure peaceful power transitions.
The decision to end term limits gathered unprecedent support among deputies, with only 2 dissenters out of the 2,980 members of the legislative body. While the result came as no surprise, as the NPC has a largely ceremonial role and is fully controlled by the government, the revision received the strongest backing among recent constitutional changes, signaling Xi’s strong grip on power. In the same vote, the NPC strengthened the party’s dominance over the state. The sentence referring to the leadership of the Communist Party of China as the most fundamental characteristic of Chinese socialism was moved from the preamble of the constitution to its main body.
At the opening session of the NPC, Premier Li Keqiang unveiled the economic targets for this year. The all-important GDP growth goal was left unchanged from last year at 6.5%. However, the wording was slightly tweaked from “at least 6.5%” in 2017 to “around 6.5%” this year. The inflation goal was left unchanged at 3.0%. Importantly, the government slashed the fiscal deficit target from 3.0% in 2017 to 2.6% in 2018, mostly due to the introduction of lower taxes and incentives. While the lower fiscal deficit target could suggest a less expansionary budget, the government is expected to use untapped funds from previous years to keep overall public spending strong. Although authorities dropped the M2 growth target, Li stated that it would growth at a similar pace to last year (9.1%). The government work report for this year did not include targets for fixed-asset investment or industrial production.
In the same event, the People’s Bank of China (POBC) announced that its monetary policy will remain neutral, with easing or tightening only as appropriate. The PBOC focus for this year will be, as expected, financial deleveraging, stricter oversight and shadow banking, along with a further opening of the financial system.
The NPC took place amid concerns of a global trade war following the introduction of tariffs, which will be effective on 23 March, on steel and aluminum imports by the United States. Although China produces nearly half of the world’s steel and aluminum, the direct impact on its economy will be limited as exports of these two commodities to the U.S. are relatively small given existing restrictions. More recently, President Trump urged China to cut its trade surplus with the U.S. by USD 100 billion in 2018 (from USD 276 billion in 2017). While the administration has not yet provided details, Trump’s words are adding fuel to the fire, and China could trigger retaliatory actions if additional tariffs are imposed. That said, Chinese authorities are cautious about threatening the U.S. with such measures. Although China’s current account surplus has narrowed in recent years and hit a 16-year low in 2017, the positive figure is largely due to massive trade surpluses with the European Union and the United States. Any trade war with the U.S. could seriously hit China’s economic outlook and investor confidence.
China is currently in a sweet spot due to strong global trade and resilient domestic dynamics. While a trade war would negatively reverberate in China’s all-important external sector, the country could still rely on its massive fiscal buffers and large domestic market to weather the blow. A trade war would nevertheless undermine its economic transition and make the economic targets more difficult to meet. Moreover, authorities would likely be tempted to resort to old recipes such as cheap credit and foreign exchange intervention to keep the economy afloat, threatening to fuel macroeconomic imbalances.