Politics Watch: Xi’s Reform Anniversary Speech Signals Political Crisis in China

◎ We believe that Xi Jinping presently faces critical levels of political risk given the political and economic problems in the regime.


Summary:

  • We believe that Xi Jinping presently faces critical levels of political risk given the political and economic problems in the regime.
  • Xi’s reform anniversary speech is an effort to have his cake and eat it too. The markets may not be convinced by his paradoxical messaging.

Updated on 12/18/2018

On Dec. 16, state mouthpiece Xinhua said that Chinese leader Xi Jinping will deliver a major speech on the 40th anniversary of the People’s Republic of China’s reform and opening up.

Xi will make the speech at a conference held at the Great Hall of the People from 10:00 a.m. CST on Dec. 18 (9:00 p.m. EST, Dec. 17).

Xi’s reform anniversary speech was about 13,000 characters-long and lasted for nearly an hour and a half. The speech largely rehashed themes from an earlier speech Xi made at the 19th Party Congress in 2017:

  • The Party leads everything and will overcome all difficulties;
  • The Party will lead the revival of the Chinese nation, build a strong military, and will establish a strong country that would “never seek global hegemony”;
  • Xi said that “no instructor can boss around” the PRC;
  • Xi said that “opening brings progress while closure leads to backwardness,”
  • Xi said that reform and opening up is “not easy” and added that the regime will be “inevitably faced with all sorts of risks and challenges, and even unimaginable tempestuous storms”;
  • Xi praised Deng Xiaoping, Jiang Zemin, and Hu Jintao for earlier reform efforts. Interestingly, Xi’s speech indirectly credited Jiang with Deng’s post-1992 reform push.

Noticeably absent from 40th-anniversary event were Party elders like Jiang Zemin, Hu Jintao, and retired Politburo Standing Committee members. In contrast, Jiang, Li Peng, Zhu Rongji, Li Ruihuan, Wei Jianxing, Li Lanqing, and other Party elders were in full attendance when Hu Jintao delivered his speech to mark 30 years of reform and opening up.

The big picture:
Xi’s reform anniversary speech comes at a moment of crisis for the Chinese Communist Party.

Externally, the CCP regime is facing increasing pressure from the United States. Washington has been confronting the PRC on virtually all fronts, including trade, cybersecurity, espionage, predatory economics, expansionism (military, economic, etc.), influence operations, and human rights.

On Dec. 1, President Donald Trump and Xi Jinping agreed to pause the trade war and carry out negotiations on market liberalization and structural reforms in China. However, the arrest of Huawei chief financial official Meng Wanzhou in Vancouver on Dec. 1 and the PRC’s detention of two Canadian citizens after the Trump-Xi summit in Argentina present a potential complication to the latest round of Sino-U.S. trade talks.

Domestically, the CCP faces severe economic, social, and political problems.

China’s worsening economy has become very obvious with the release of official data for November. For instance, key indicators like industrial output and the Purchasing Managers’ Index have dropped to record low levels. Meanwhile, in a lecture to senior business executives on Dec. 16, Renmin University economics professor Xiang Songzuo, said that a “very important institute” in China estimated that China’s GDP growth for 2018 should be about 1.67 percent or even negative, and not the statistics bureau’s official figure of 6.5 percent.

Socially, more and more Chinese are joining the ranks of the disenfranchised to protest the authorities and seek betterment in their condition. Prominent disenfranchised groups include military veterans and victims of P2P lending platform failure.

Politically, the CCP factional struggle appeared to enter a critical phase in July, and tensions have escalated ever since. We previously analyzed key developments in the latest phase of the factional struggle over several articles (see here, here, and here).

Our take:
1. We believe that Xi Jinping presently faces critical levels of political risk.

We wrote on Dec. 5: “Xi must hold a Fourth Plenum to set the reform agenda. If no Fourth Plenum is held, this means that the factional struggle is extremely intense and Xi is in grave danger.” The fact that Xi is delivering a major reform speech instead of holding the Fourth Plenum (a key Central Committee conclave) on the 40th anniversary of reform and opening up suggests that he cannot bring the Party to a consensus on the structural reforms and market liberalization policies which he wishes to implement. And if Xi cannot get consensus during a dire time for the regime both domestically and geopolitically, this suggests that he still faces significant political resistance.

Presently, the only CCP power network with enough influence and motivation to roadblock Xi Jinping on the issue of reform is the Jiang faction.[1] While much weakened by Xi’s anti-corruption campaign, the Jiang faction remains a threat to the Xi leadership today because it appears to still have some sway over key Party organs like propaganda, domestic security, and the intelligence apparatus. For instance, a prominent Chinese economist recently identified the Beijing-based Duowei News as an “external propaganda media of the Ministry of State Security system” after Duowei released a series of articles condemning Xi and his policies in the December edition of its print magazine and its website after Trump and Xi had their dinner meeting. (We previously traced the connections between Jiang faction number two Zeng Qinghong and the MSS.) We earlier analyzed that the Duowei articles could be part of a Jiang faction plan to generate momentum to oust Xi in the name of “bringing order out of chaos” (“撥亂反正”), or a repeat of what Deng Xiaoping and other senior CCP cadres did to purge the “Gang of Four” after the Cultural Revolution. However, the success of the Trump-Xi talks meant that Xi’s rivals could not immediately hold him accountable for tanking market confidence and ruining the Chinese economy.

The Jiang faction is likely highly motivated to remove Xi or at least scuttle his efforts at reform in the coming days because Jiang’s political legacy and their survival are at stake. CCP leaders have traditionally taken extreme actions to preserve their political legacy because factional struggles are “you die, I live” (“你死我活”) affairs. For example, Mao Zedong launched the ruinous Cultural Revolution and had his former number two Liu Shaoqi persecuted to death when he sensed that his political legacy (the Great Leap Forward, etc.) could be overturned. Deng Xiaoping removed two reform-minded successors (Hu Yaobang and Zhao Ziyang) and approved of the massacre in Tiananmen Square to safeguard his political legacy. Likewise, the Jiang faction can be expected to use whatever influence they have left to slow down, if not outrightly bring down, Xi Jinping before March 2019, the deadline for the country-wide implementation of Xi’s Party and state institutional reforms announced in March 2018. Once the reforms are fully implemented, Xi will have direct control over the intelligence apparatus through the CCP National Security Commission, a move which would weaken the Jiang faction’s sway over a key regime organ. Also, the “610 Office,” which coordinates Jiang’s persecution campaign against the Falun Gong spiritual discipline, will be abolished as part of institutional reform, a development which paves the way for Xi to potentially overturn a crucial part of Jiang’s political legacy.

In analyzing why Xi removed presidential term limits, we noted that he needs to be “successful in his reforms to avoid ending up the loser in the Xi-Jiang factional struggle, a consequential political battle with dire implications for Xi and China.” Crunch time has now arrived for both the Jiang faction and Xi.

2. Given the political and economic dangers facing the regime, we believe that Xi Jinping is very possibly trying to “steal a march” on his opponents and force the regime to “cross the Rubicon” on structural reform by delivering a speech on the anniversary of the PRC’s reform and opening up.

Like Deng Xiaoping before his “Southern Tour” in 1992, Xi faces resistance to reform from internal opposition (coincidentally, also the Jiang clique). Deng’s “Southern Tour” was intended to signal to opponents that “whoever doesn’t reform will have to step down.” Xi’s reform anniversary speech may very well be remembered as his way of warning political rivals that “whoever doesn’t reform will be purged.”

Xi’s speech, which comes before an annual economic policy-setting meeting from Dec. 19 to Dec. 21, will also likely be aimed at winning goodwill from the Party princelings and the masses, as well as signal to Washington that Xi is “all in” on making good on his commitments to President Trump.

Addendum
Points 1 and 2 were written before Xi gave his speech. While Xi’s positive assessment of Jiang Zemin confirms our analysis in Point 1, it also means that we were too optimistic in Point 2 about Xi’s ability to handle the factional struggle.

In analyzing Xi’s reform anniversary speech, it appears that the CCP factional struggle may be more critical than we previously assessed. Xi might not feel confident enough to tackle the Jiang faction, and has instead offered a “concession” to the faction by indirectly affirming Jiang’s “contributions” to reform and opening up. In other words, Xi might still be hoping that he can “unite” the Party factions to push through reform within the 90-day period and avoid all-out “civil war.” If this is indeed Xi’s line of thinking, we are not optimistic that he can fulfill the Dec. 1 commitments made to Trump.

The coming National Economic Work Conference will likely offer more insights into Xi’s current thinking on reform and the factional struggle.

What’s next:
1. We clarified what we meant by reform in the CCP context back in February. Those expecting Xi Jinping to make Western-style liberal reforms in the coming days will likely be disappointed.

However, depending on the state of the factional struggle, Xi might be able to meet most, if not all, of his Dec. 1 commitments to Trump.

2. To successfully carry out the structural reforms and market liberalization policies which Trump is requesting, Xi also needs to implement a series of other reforms to keep market confidence and prevent the economy from tanking.

We wrote on Dec. 5: “Aside from resolving political issues, Xi may implement pro-market reforms and shrink the bureaucracy to signal reform, rescue the worsening economy, and reverse the unemployment trend.”

Some reforms that Xi could announce to achieve the above include:

  • Taxation reform, including large tax cuts for corporations (10 to 20 percent);
  • Bureaucratic reform, including greatly trimming the bloated government bureaucracy, retrenching government staff, and cutting government expenses;
  • Gradually reform “stability maintenance” policies to cut down on government spending and win back the people’s trust to actually stabilize, and not suppress, society. However, efforts to reform “stability maintenance” will likely be drawn out by the factional struggle and escalating tensions in Chinese society.

3. Market confidence could vanish if Xi doesn’t announce pro-market reforms at the annual economic policy-setting meeting or during a Fourth Plenum (if one is held).

Addendum
In his reform anniversary speech, Xi praised Marxism-Leninism and CCP theories while talking about reform and opening up. Xi’s attempt to court both Party hardliners and reform-minded cadres while stressing his paramount position in the CCP suggests that he wants to have his cake and eat it too. The markets, however, might not react well to Xi’s paradoxical messaging.

Notes:
[1] Some clarifications and definitions are due.

First, by “Jiang faction,” we are referring to the expansive patron-client networks and interest groups in business and politics connected to or established by Jiang Zemin and his key cronies (Zeng Qinghong, Bo Xilai, Zhou Yongkang, Guo Boxiong, Xu Caihou, etc.) over the past two decades. Those that benefit from associating with Jiang and his lieutenants—such as officials who win promotions and businessmen who made fortunes due to Jiang faction connections—in turn have incentive to support the faction in preserving its political legacy.

Second, the mainstream view of Jiang in the West, i.e. that he is a “reformer” who oversaw a more “liberal” period in CCP history (1997 to 2010s), is at best misguided. Describing Jiang and his cronies as “liberal” is a misnomer because repression and human rights abuses were very severe during Jiang’s era of dominance (1997 to 2012); there is a good reason why Zhou Yongkang earned himself the moniker “security czar” during his stint as head of the Central Political and Legal Affairs Commission (2008 to 2012). And if Jiang was a bona fide “reformer,” then the Trump administration would not be able to credibly accuse China of failing to abide by the conditions of joining the World Trade Organization in 2001, as well as a whole host of pernicious behavior. Mainstream accounts of the Jiang and Hu Jintao years also tend to omit or downplay the rampant corruption that Jiang Zemin, his clan, and his faction quietly partook in and endorsed (“make a fortune while keeping a low profile,” or “悶聲發大財”).

That Jiang and his cronies are still viewed with rose-tinted lenses in the West today is revealing of the success of CCP external influence operations carried out during Jiang’s era of dominance (including the Great External Propaganda Plan) and the Red Matrix.