China’s new top economics team comprises horses for courses. Collectively they signal the intention of the new Xi-Li leadership to push ahead with economic reform. Individually they bring particular expertise that will be needed to overcome what are emerging as the biggest obstacles of reform, state-owned enterprises and local government.
Zhou Xiaochuan, as expected, will continue as governor of the People’s Bank of China. Regarded as the architect of financial markets liberalization since taking over as head of the central bank in 2002, he will likely drive forward further opening of the capital account and the internationalization of the yuan. The PBOC has long been thought to have pencilled in 2015 as the date for full convertibility of the currency. Zhou’s task will be to continue with lifting capital controls, liberalizing interest rates and developing capital markets.
Lou Jiwei becomes finance minister. The former head of the country’s sovereign wealth fund was also the architect of China’s tax reforms in 1994. His task will be to lift the tax burden on small and private firms, seen as important drivers of rebalancing the economy towards more domestic consumption, and to reform local-government finances so local officials cease to be reliant on land sales for revenue, and all the cosy dealing that goes along with that. His objectives may be the politically most difficult facing the quartet.
Xu Shaoshi takes over as economic planner-in-chief as head of the Natinoal Development and Reform Commission. A former land and resources minister, his piece is to steer strategic investment away from spend-and-build real-estate plays and towards productive infrastructure.
Gao Hucheng, as commerce minister, doesn’t have the same scale of reforming role, but he will have to oversee the country’s exporters, moving them up the value chain and making sure that they don’t become an obstacle to reform as the economy rebalances away from being export- and infrastructure investment-led. At the same time he will have to deal with potentially increasingly tetchy trade disputes, both with China’s two biggest trading partners, the EU and the U.S., and with its regional neighbors, and with a patchwork of free trade agreements being negotiated in all directions. That potentially gives him both stick and carrot when it comes to domestic interests.
The sharp end of reform will be making China’s interest rates and currency more market driven and to open up the capital account. Expanding capital markets would end subsidised access to funds for state-owned enterprises. Expanding revenue-raising options beyond property development that local government officials have for years used to generate the local economic development on which their promotion depends, would cut to the heart of a massive web of kickbacks and cosy deals with local developers.
The drive appears to be getting backing from the top. Li Keqiang, in his first press conference as prime minister, warned that vested interests would be tackled. President Xi Jinping gives every impression he understands that reform is necessary to put China’s economy on a more stable long-term footing – and thus keep the Party in power. Vested interests and political hardliners are still to be convinced.