NEWS / Foreign Exchange

China: No clear cut victory for Hu Jintao

The results of yesterday??™s central committee election to the main Communist Party (CP) body have been announced today. Not surprisingly, Communist Party General Secretary and current President Hu Jintao was re-elected for another five years as head of the CP. But the most important message is that Hu has surprisingly not been able to consolidate his power in the CP apparatus significantly.

Hu??™s position within the Standing Committee of the Politbureau (SCP), the most powerful political body within the CP, remains weak. Hu Jintao and his ???new left??? fraction can probably only count on three votes in the SCP and the Shanghai Faction by far remains the strongest faction (see table below). Although Hu got rid of his former main rival for the party chairmanship and current vice-president, Zheng Qinghong, three of the four new members are believed to be members of the Shanghai Faction. At 68 years of age, Zheng would be expected to resign from the SCP by 2012 and was no longer a serious contender for CP leadership although he is still considered the main leader of the Shanghai Faction.

Surprisingly Hu was only able to have Li Keqiang from his own New Left faction elevated into the SPC. Li is Hu??™s preferred candidate to succeed him as CP chairman at the next CP Congress in 2012 but it increasingly looks like Hu will not be in a strong enough position to appoint a new ???crown prince???. Based on the current composition and ranking within the PSC, Xi Jinping must now be regarded as favourite to succeed Hu as party chairman in 2012. Xi is the current CP boss in Shanghai and although he is mostly regarded as a member of the Shanghai Faction he is on very good terms with Hu and hence could be regarded as an acceptable compromise for the major factions within the CP.

We will have to wait for the government reshuffle in March before the political transformation for second term Hu leadership is complete. More importantly a new vice-president to succeed Zheng Qinghong will have to be appointed and this will be the first clear indication of who is going to succeed Hu in 2012. Most likely a new board governor for the Peoples Bank of China will be appointed in March.

What are the major implications?

• With the CP Congress out of the way we expect the political process in China to gradually return to normal. Hence, it is more likely that the Chinese leadership will introduce more decisive tightening measures, if growth and inflation continue to prove unsustainable.
• We continue to believe that new political initiatives will accelerate during Hu??™s second term despite Hu??™s consolidation of power having been significantly less than expected. Major new initiatives will probably have to wait until the government reshuffle in March. Focus in economic policy is expected to be on redistribution, creation of a social welfare system and increased environment protection. But Hu??™s weak position within the SCP remains a major uncertainty. For Hu and China the risks remain that his second term, like his first term, will remain rich on words but poor on deeds.