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The next 12 months will provide a more difficult test for Xi ’ s abilities
to crack down on “ asset bubbles ”, Li has claimed that the “ economy had fared better than expected so far this year ”.
Another sign of the stimulus policies in action is shown in chart 5 , highlighting the continuing surge in China ’ s sales of passenger cars this year . More than 70 % of these sales have benefited from Li ’ s decision to halve the 10 % sales tax on cars with under 1.6 litre engines . This tax cut was introduced a year ago , after a run of poor sales months ; and volumes this year are now up 16 % as the stimulus policy has taken hold .
These policy contradictions are often taken at face value by outside observers , who then question whether Xi is actually undermining his own reform programme . Thus the Wall Street Journal has recently argued that :
“ The problem is that Mr . Xi ’ s agenda is selfcontradictory . It at once calls for deepening reforms , and the rule of law , while demanding strict conformity with party orthodoxy . This recipe , which can be called reform without opening up , has failed to produce results .”
What this analysis misses is the context within which Xi is operating . His only option is to try and tighten his control of the government in response to Li ’ s renewed push to implement Populist policies . In turn , this highlights how fundamental economic reform depends on the President to make it happen . If his policies continue to be rebuffed by Li , and he loses control of the government apparatus , the proposed changes will not only be watered down , but may well be abandoned .
This is hard for Western observers to understand , who naturally tend to see economic and political reform as being inextricably linked . But Xi himself has never shared this view , as he emphasised in a major interview last year , before his US visit :
“ Reform steps have upset the vested interests of some people , and caused changes
to the career and life of some people . It is only natural that there will be difficulties .
Otherwise it will not be a reform . That is why I said that we must be bold enough to crack hard nuts and ford dangerous rapids during reform and that only the daring will prevail at key stages of reform ”.
We can see this delicate process at work in the State Owned Enterprises , where Xi has been pushing forward with the reform agenda via his leadership of the “ Central LSG for Comprehensively Deepening Reform ”. Experiments have taken place with mixed private / public ownership , and the introduction of employee shareholdings , as well as other innovations . Such caution makes good sense when introducing new concepts which have the potential to create major resistance from vested interests . Effectively , it is Deng Xiaoping ’ s dictum of “ Crossing the river by feeling the stones ”.
The key issue is that China ’ s Communist Party is not a monolithic , cohesive entity where the entire membership operates in perfect synchronisation . The state ’ s control of the media means that this factional infighting is usually conducted out of sight – a clear contrast to the process in the West , where the pendulum has swung to the opposite extreme as one can currently observe in the US Presidential election .
Context is also critical in this regard . A growing economy will typically reduce the need for factional fighting , as the pie is will often be large enough to satisfy most needs . But a slowing economy , particularly one like China ’ s where the growth rate has fallen dramatically in recent years , will inevitably see increasing turmoil .
It is clear that Xi ’ s use of the Leading Small Groups mechanism has so far enabled him to outmanoeuvre Li in the most critical decisionmaking areas connected to the reform process . But we suspect that the next 12 months will provide a more difficult test of his abilities :
• As Reuters has reported , Li is currently pushing to appoint 3 Populist allies to the PSC , which would give him a 4 – 3 majority against Xi ’ s Princeling faction