Investors trying to make sense of China’s National People’s Congress last week and its relation to the more important 19th Party Congress to be held later this year should familiarize themselves with an old saying: “The mountains are high and the emperor is far away.”

Orders from Beijing are often ignored in the cities and provinces. Instead, important decisions such as whether and how to restructure the debt of insolvent local governments and state-owned enterprises are made locally. 

Officials on the ground decide whether to actually shut down excess capacity in state-owned enterprises and whether to risk an increase in unemployment because some enterprise or industry (think coal mining, steel, solar panels) has become non-viable, a drain on the public finances, or an environmental danger.

It’s for those reasons that China’s leadership was largely unable to meet the goals of 18th Party Congress of 2012, which sought to move the nation away from an unsustainable economic development model driven by explosive growth in corporate and local government debt, exports, capital expenditures and the production of often environmentally damaging physical goods to a “greener” one driven by lower leverage and domestic demand for services. The problem was that the plan gave little regard to the disastrous “grow at any cost” mindset of local and provincial authorities.

Many markets benefited. In 2016, China imported 33 percent of the world’s total dry bulk commodities, followed by Japan at a distant second at 8 percent and India at 6 percent. Home values skyrocketed, fueled by the central bank’s looser monetary policies.

Power may be more centralized under General Secretary Xi Jinping than it has been since Deng Xiaoping -- or even Mao Zedong. Xi is the chair of an unprecedented number of committees that span every important aspect of political, military, economic, social and cultural decision making. Indeed, Xi has been granted the designation of “Core Leader” of the Party, an honorific only ever bestowed before on Mao, Deng and Jiang Zemin. Yet, current developments suggest that even though power is centralized, it is not sufficiently securely held enough for Xi to truly focus on the economy.

Global investors are intrigued by the opportunities held by the sheer size of China’s markets. But rather than dealing with economic issues, Xi’s domestic focus is still carrying out the anti-corruption campaign that was launched following the conclusion of the 18th Party Congress. No local government or a SOE leader is willing to pursue economic reform or much of anything else for which there isn’t ample officially sanctioned precedent.

Internationally, Xi has also focused on regional political and geopolitical issues. His pro-globalization speech at the World Economic Forum in Davos earlier this year wasn’t about economics but about regional and geopolitics. The economy was, at best, fourth in the list of priorities.

The 19th Party Congress may, at last, enable Xi to consolidate power to the point that he can give the economy the attention it has been denied but badly needs, bolstering the confidence of international investors.

Of the seven members of the Standing Committee of the Central Political Bureau of the Communist Party of China -- the supreme decision-making body in China -- as many as five could be replaced “peacefully” at the 19th Party Congress because they have reached the informal age of retirement of 68. Xi is 64 and Premier Li Keqiang is 61. Only one of the five, Wang Qishan, who oversaw most of the corruption purge, is a clear ally of Xi. That means by the end of 2017, Xi could at last achieve the kind of control that would permit him to focus on the economy.

There is another dimension to Xi’s political control and tenure. No gneral secretary of the Communist Party since Mao has served more than two terms of five years each. Xi’s first term started on Nov. 12, 2012. According to established norms, Xi would have to retire in 2022, both because he will have served two terms as general secretary and because he will be 70 years old. If he currently has any designs on staying in office for longer than that, he could try to persuade the party to let Wang Qishan stay on as a member of the Politburo Standing Committee beyond the age of 68.

This will definitely be an NPC worth watching.

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By Junheng Li

Junheng Li is the founder of JL Warren Capital LLC, an independent equity research firm focused on Chinese companies and the Chinese economy. -- Ed.

(Bloomberg)