Source: WSJ (7/21/16)
Discord Between China’s Top Two Leaders Spills Into the Open
President Xi and Premier Li offer conflicting messages on the economy, showing a crack in party’s united front
By LINGLING WEI and JEREMY PAGE
Chinese President Xi Jinping, left, and Premier Li Keqiang, shown at an event in March, have offered conflicting messages on reforming state-owned industries. PHOTO: WANG ZHAOWANG ZHAO/AGENCE FRANCE-PRESSE/GETTY IMAGES
BEIJING—Earlier this month, President Xi Jinping and Premier Li Keqiang both delivered forceful instructions on how to reform China’s state-owned sector. Their messages directly contradicted one another.
On July 4, officials of the State Council, China’s cabinet, were read remarks by Mr. Xi calling for “stronger, better, bigger” state juggernauts, with a central role for the Communist Party in their management. Mr. Li’s prepared comments stressed the need to “slim down” state companies and to “follow market rules” in remaking them.
Party insiders and China experts say the conflicting messaging and other recent episodes, including thinly veiled criticism of Mr. Li’s policies from the Xi camp, show how discord between the top two Chinese leaders is increasingly spilling into the open, a remarkable departure from the unified front China’s leaders traditionally seek to present.
In the short term, the disunity is adding another layer of uncertainty over leaders’ promised restructuring of the Chinese economy, which has appeared stuck in recent months.
Officials involved in overseeing the state sector have gathered in recent days to “study the spirit” of the conflicting July 4 instructions. Some remained confused. “There is a lack of clear direction from the top,” said an official at the State-owned Assets Supervision and Administration Commission who attended the study session. “Everybody is waiting to see what others might do,” he said. The result: “inaction.”
Press officials at the commission and the State Council didn’t respond to inquiries.
The longer-term concern is any political impact of a split. Conflict within the leadership has been a feature of modern China’s most tumultuous periods, from the Cultural Revolution to the 1989 Tiananmen Square protests. The party’s legitimacy rests in large part on being able to project an image of uniform and levelheaded decision-making at the top.
Mr. Xi, like China’s last two top leaders, is president, party chief and head of the military. The premier heads the cabinet and for most of the last four decades has managed the economy, with other duties divided among other senior party figures.
Mr. Xi has reversed that collective leadership model and centralized decision-making within a number of small committees he heads, including over the economy. His supporters say the party leadership had become weak and corrupt in the previous administration and now needs a strong central figure to maintain public support while overhauling the economy.
Detractors say Mr. Xi has taken on too much to govern effectively, while stripping authority away from Mr. Li and other more qualified economic stewards. Mr. Li has acquiesced to that treatment for the last two to three years, but in recent months, supporters say, he has been actively undermined.
Rumors now abound within the party about whether he will be replaced as premier in next year’s reshuffling of key party posts. Messrs. Xi and Li are the only two members of the seven-man Politburo Standing Committee—the top leadership body—not due to retire.
The two men have very different backgrounds and public personas. Mr. Xi, 63 years old, whose father was a revolutionary hero, has close personal ties to other descendants of the party elite and has cast himself as a paternalistic, if aloof, authoritarian. The bookish and affable Mr. Li, 61, came to prominence as a star student of law and economics. He rose through the ranks of the Communist Youth League, becoming a favorite of the previous party chief, Hu Jintao.
The first episode of the discord came in May, when the official People’s Daily published a lengthy front-page interview with an unidentified “authoritative person,” which criticized the heavy role of credit in driving first-quarter growth. Mr. Xi’s top economic advisers drafted the article under his instruction, according to people familiar with the matter, who said Mr. Xi was upset that China unleashed 4.6 trillion yuan ($697 billion) in bank credit from January through March, even exceeding stimulus in 2009 during the depth of the financial crisis.
Mr. Xi was worried that his plan to pare debt and industrial overcapacity was “on the line,” one of the people said. While the article didn’t mention Mr. Li by name, the people said it was meant as a public rebuke of the premier’s stimulus policies.
In addition, the article poured cold water on a debt-for-equity swap program publicly touted by Mr. Li in March, saying such a program shouldn’t be used to keep alive “zombie” firms—money-losing companies in industries with excessive capacity.
People sympathizing with the premier say he was simply trying to meet the growth target set by the leadership, and to ensure sufficiently high growth for economic reforms to succeed. Mr. Xi has advocated overhauls while also insisting growth stays on target, and he has backpedaled on his 2012 pledge to embrace market forces. His decrees on the state sector in the past year, for example, have centered on strengthening the party’s control.
“Li Keqiang has been placed in an impossible position,” wrote Barry Naughton, an expert on China’s economy at the University of California, San Diego, in a paper published this week. ”Economic policy has moved in a fundamental way into Xi Jinping’s shop, and out of Li Keqiang’s shop. Li cannot be happy with this, and it is hard to see how the Xi-Li relationship can be maintained under these conditions.”
A big risk from the policy uncertainty, said Arthur Kroeber, co-founder of China-focused research firm GaveKal Dragonomics, is that needed changes, such as the closing of money-losing factories, stall. “It’s increasingly clear to me that China’s economic program is not very coherent,” he said.
The report last week of second-quarter growth of 6.7%— the same pace as in the first quarter, despite multiple headwinds—was seen as a sign that leaders continue to use an old stimulus playbook of credit expansion and state spending rather than tackling inefficiencies.
Some state-company executives are confused. “Can we be a big state employer and at the same time profitable?” asked a senior official at a state-backed shipping company in Shanghai. “It would be very hard to do in reality.”
It isn’t clear to what extent the tension reflects deeper differences in outlook of the kind that caused previous leadership clashes. “Xi and Li may disagree over specific policies, but their differences are minor in the grand scheme of things and the result of political jockeying, not principle,” said Scott Kennedy, a deputy director at Center for Strategic & International Studies, a Washington think tank.
China’s social-media users are cautious in discussing the divide, using coded references to a split between the southern and northern parts of the party and government’s Zhongnanhai leadership compound, where Messrs. Xi and Li work, respectively,
In what people familiar with the matter depict as a subtle response by Mr. Li to criticism in the People’s Daily article, four words were added to a state-media news report about a May 9 conference call led by the premier. The words, which these people say weren’t part of the call, were xiang ren wei guo, an idiom loosely translated as “the premier endures for the nation.” They say Mr. Li personally vetted the media report before it went out.
This month, Mr. Xi held a meeting with more than two dozen of the country’s top economists and analysts. Mr. Li wasn’t invited, according to people with knowledge of the matter.
“It’s a meeting held by Xi Dada,” one of the people said, using a popular nickname for Mr. Xi. “It’s not necessary for Li to attend.”
Two days later, Mr. Li held his own round-table discussion with a separate group of economists, according to state media reports. Despite growing challenges this year, he said, China’s economy has performed “steadily and within expectation.”