China’s Urban Champion Li Gets Task of Reviving Reform

China's Vice Premier Li Keqiang
China's vice premier Li Keqiang waves as he arrives at the Boao Forum for Asia in Boao, Hainan Province. Photographer: Ed Jones/Pool via Bloomberg

China’s premier-designate is famed for running a province that saw three fatal conflagrations and an enduring HIV blood scandal on his watch. The nation may be hoping his luck has changed.

Li Keqiang, reappointed to the Communist Party’s Central Committee today and forecast to replace Premier Wen Jiabao, is an award-winning economist and English speaker who has championed rapid urbanization to establish China’s middle class. Slated to take over the nation’s cabinet in March, Li, 57, will inherit an economy forecast to grow the least in 23 years in 2013, according to Pacific Investment Management Co.

To arrest the slowdown and address a widening income gap that’s fed social unrest, the incoming team will have to roll back state enterprises and speed a shift to market-set prices for everything from loans to raw materials, according to the World Bank. Li’s association with the bank’s “China 2030” report this year may be the strongest sign he’s ready to rejuvenate the reform agenda unleashed by Deng Xiaoping three decades ago.

“The 2030 report is a very important base of policy recommendations, and it was endorsed by Li Keqiang,” said Ding Shuang, senior economist for China at Citigroup Inc. in Hong Kong, who previously worked at the country’s central bank. “China’s economy has reached such a point that the leaders are being pressed to take more ambitious steps. On the flip side, vested interests are more entrenched,” making the changes tougher to enact, he said.

Delayed Publication

One signal of the sensitivity of the policy overhaul is a delay in publishing the Chinese version of the 448-page document co-written by the Washington-based lender and the Development Research Center of China’s State Council. The DRC wanted a postponement until after the Communist Party Congress, according to Yukon Huang, a former World Bank country head for China and an adviser on the project.

The Party Congress is scheduled to conclude today and the Politburo Standing Committee, the top decision-making body, will be unveiled tomorrow. “China 2030” is likely to be released in Chinese next month, according to Li Li, a spokeswoman at the World Bank in Beijing.

At stake for Li and incoming Communist Party General Secretary Xi Jinping is steering China away from the so-called middle-income trap, where growth slows because of a failure by developing countries to implement reforms to financial, legal and government institutions needed to create a wealthy middle class. Of 101 middle-income economies in 1960, only 13 became high-income societies by 2008, the World Bank estimates.

Li ‘Unwavering’

Li gave the “China 2030” project his “unwavering commitment,” then-World Bank President Robert Zoellick said in February.

The State Council group that helped in the project sought to flag the risk of forgoing reforms, according to Huang.

“The Development Research Center people were always afraid that the report was not negative enough in saying, ‘You’ve got a crisis,’” Huang said. “There are still many who say, ‘What’s the problem? This economy is still growing so well.’”

Li hasn’t been slow to acknowledge the challenges. In a February 2010 speech he reeled off a litany of economic shortcomings: an unsustainable rate of investment; an overdependence on exports; weak domestic consumption; and an underdeveloped services sector. Above all, Li highlighted the growing inequality of income that meant city dwellers earned 3.3 times more than their rural counterparts in 2009.

Vested Interests

To deal with those issues, Li may have to overcome resistance from politicians, provincial governments and state-run companies that have grown rich on the current system.

“The big question is whether China will change before a crisis forces it to,” said David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department. “China can, and ultimately will, rebalance either the easy way or the hard way,” said Loevinger, now an Asia analyst in Los Angeles at TCW Group Inc., which oversees $135 billion.

A shrinking supply of the young workers who operated the nation’s factory lines will further hamper efforts by Li and Xi, who is forecast to become president in March, to effect change.

Li has already had his share of coping with crises in his career.

Blood Program

At the age of about 43, he became governor of Henan province, where a government-backed program had for years been taking blood from mostly poor rural farmers, pooling it to extract the plasma and then reinjecting the red cells back into the donors to prevent anemia. The blood was improperly screened and hundreds of thousands contracted HIV, the virus that causes AIDS, New York-based Human Rights Watch wrote in a March 2006 report.

Even after the central government acknowledged the problem and ordered the collection centers to be shut down, many continued to operate, the report said. While Li took charge of the province later, in 1998, victims complained the government failed to deal with the effects of the epidemic. Potential petitioners to China’s National People’s Congress were put under house arrest, preventing them from seeking redress, the Human Rights Watch report said.

“I have always been puzzled how he continued to be promoted after the horrible HIV/AIDS epidemic, which he handled so badly,” said Andrew Nathan, a professor of political science at Columbia University in New York and member of Human Rights Watch’s Asia advisory committee.

Three Fires

In his six years in charge of the province of about 93 million people, bigger than Germany’s population, Henan also suffered three major fires that killed more than 400 people, giving him the nickname “Three-Fires Li” and a reputation for bad luck.

The first blaze was in a furniture factory in April 1999, the second in a movie theater in March 2000 and the third, the most serious, on Christmas Day the same year in a dance club, killing at least 309.

Even with better luck, Li would have to push through an economic overhaul in the face of resistance from those who have prospered under the current system and who blocked progress under outgoing President Hu Jintao and Premier Wen, said Willy Wo-Lap Lam, an adjunct professor of history at the Chinese University of Hong Kong.

State-run companies such as China National Petroleum Corp., the country’s biggest oil producer, and China Petrochemical Corp., or Sinopec, its largest oil refiner, have expanded with the help of funding from state-owned banks, and backing from a government keen to acquire mineral rights around the world.

Fearing Li

“Powerful blocks within the government and big state companies like CNPC and Sinopec won’t be listening to a weak premier, just like they didn’t listen to Wen Jiabao,” Lam said. “To be effective he needs to be somebody like former Premier Zhu Rongji, who was a charismatic leader who dared to ram orders through the bureaucracy. People feared Zhu Rongji, but nobody is going to fear Li Keqiang.”

Li’s supporters point to his qualifications and experience, which ranges from his time as a manual laborer during the Cultural Revolution to almost a decade he spent helming Henan and then Liaoning provinces, which grew at more than 10 percent annually while he was in charge. He has a law degree and a Ph.D. in economics.

“He is a new generation of leader,” said Robert Kuhn, author of “How China’s Leaders Think” and an adviser to the Chinese government.

Manual Labor

Li was born in Anhui province in central China in July 1955 to a father who was a county-level government official. During the Cultural Revolution he was sent to work in the countryside, spending more than two years doing manual labor in the Dongling Production Brigade in Damiao Commune.

His path to the pinnacle of China’s political system began in 1978, when he was among the 401,000 out of 11.6 million applicants to pass the college entrance examinations, according to Li Cheng, a China scholar at the Brookings Institution in Washington. He earned a law degree at Peking University, where many of the student leaders of the 1989 Tiananmen Square protests studied.

He rose up the ranks in the 1980s in the Communist Party’s Youth League, where Hu Jintao was a leader at the time. “Each of Li Keqiang’s major promotions in the past 15 years has paralleled the growing power of Hu,” Li of Brookings wrote in a 2007 paper.

Li is married to Cheng Hong, a professor of English at the Capital University of Economics and Business in Beijing.

Economic Prize

Li studied for his Ph.D. in economics between 1988 and 1994. A 1991 treatise he wrote entitled “On the Tri-Structure of China’s Economy” was a winner of the Sun Yefang Award for 1996, one of the top domestic economic prizes. In Li’s dissertation, his arguments for faster urbanization began to appear, a theme that has remained central to his career.

Once he became head of Liaoning in 2004, in northeast China’s industrial rust belt, he was able to put some of those ideas into practice.

In one initiative, he redeveloped shantytowns to let 1.2 million people move into new homes, according to Kuhn. The policy was a forerunner of his support for plans to build 36 million low-cost homes between 2011 and 2015 to help rein in surging house prices.

Li’s idea is that, as people shift from farms to cities, their wages and consumption will rise, helping reduce the nation’s reliance on investment, said Shen Minggao, head of China research at Citigroup in Hong Kong.

Olive Bulge

That in turn will boost the size of the middle class in China’s society, giving it a bulge in the middle, like an olive, Li said in the 2010 speech.

Li seems “to be positioning himself as the urbanization premier,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. “If urbanization can be done right, then many of China’s imbalances can be solved.”

More than 100 million people left farms during Hu’s presidency, many for jobs in urban factories that helped China overtake Japan as the world’s second-biggest economy. As many as 300 million more will move from the countryside by 2030, to join 600 million already living in cities, the Organization for Economic Cooperation and Development estimates.

“Urbanization is a key pillar of the next China and, contrary to the doomsday crowd, it is the fuel for a sustained high-investment ratio in Chinese GDP,” said Stephen Roach, former nonexecutive chairman at Morgan Stanley in Asia and a senior fellow at Yale University in New Haven, Connecticut. “But here is the catch -- urbanization is a transition strategy at best. It will have to have an increasingly services-led job creation to absorb the influx of surplus labor and only then can the urbanization strategy really come to life.”

Income Plan

Signs that China may step up efforts to shift the economy toward services and greater consumption include a plan for income distribution to be announced by the end of the year, according to a Nov. 1 report by Xinhua.

The plan will include opening up government-controlled industries to private investors, improving earnings for low-income groups and increasing taxes for state enterprises, Xinhua reported, citing officials close to the plan.

China’s new leaders are about to set off a “Big Bang” in financial markets that will “revolutionize the country’s financial system,” HSBC Holdings Plc wrote in a Nov. 6 report.

“Economic reform is back on the agenda,” said Barry Naughton, author of the 2006 book “The Chinese Economy: Transitions and Growth” and a professor at the University of California at San Diego. “I’m now confident that within a year there will be some kind of major push to put together a package designed to renew reforms. The question is can they overcome interest-group resistance?”

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