China’s Biggest Challenges: Seven Things Xi Needs to Nail in 2017

By Bloomberg News

Last year turned out pretty well for Chinese President Xi Jinping. The economic slowdown stabilized, relations with neighbors such as the Philippines improved, and Xi strutted the global stage while hosting the Group of 20 for the first time. The year ahead, however, could be more trying as Donald Trump enters the White House and Xi presides over a Communist Party reshuffle.

Here are seven challenges facing Xi in 2017:

Politics

A party congress planned for the fourth quarter marks a pivotal juncture in Xi’s reign as China’s top leader and could unveil his possible successors five years on. The closed-door gatherings in Beijing will reshuffle much of the ruling party’s Central Committee, with as many as 11 of the elite Politburo’s 25 members due to step aside, if past retirement conventions are followed.

Xi, whom the party anointed as its “core” leader in October, could use that authority to dispense with age limits and maintain his preferred lineup on the Politburo’s seven-member Standing Committee. All but Xi and Premier Li Keqiang exceed the unofficial retirement age of 68.

China’s Politburo Standing Committee

68 or older

Standing Committee

Xi Jinping

63

Li Keqiang

61

Zhang

Yu

Liu

Wang

Zhang

President

Premier

Dejiang

70

Zhengsheng

71

Yunshan

69

Qishan

69

Gaoli

70

Chairman,

Chairman,

Secretary,

Secretary,

Vice Premier

National

Chinese

Central

Central

People’s

People’s

Secretariat

Commission

Congress

Political

for Discipline

Consultative

Inspection

Conference

Source: Chinese Communist Party

China’s Politburo Standing Committee

68 or older

Standing Committee

Xi Jinping

63

Li Keqiang

61

Zhang

Yu

Liu

Wang

Zhang

President

Premier

Dejiang

70

Zhengsheng

71

Yunshan

69

Qishan

69

Gaoli

70

Chairman,

Chairman,

Secretary,

Secretary,

Vice Premier

National

Chinese

Central

Central

People’s

People’s

Secretariat

Commission

Congress

Political

for Discipline

Consultative

Inspection

Conference

Source: Chinese Communist Party

China’s Politburo Standing Committee

68 or older

Standing Committee

Li Keqiang 61

Premier

 

Xi Jinping

63

President

Zhang

Yu

Liu

Wang

Zhang

Dejiang

70

Zhengsheng

Yunshan

69

Qishan

69

Gaoli

70

Chairman,

71

Secretary,

Secretary,

Vice Premier

National

Chairman,

Central

Central

People’s

Chinese

Secretariat

Commission

Congress

People’s

for Discipline

Political

Inspection

Consultative

Conference

Source: Chinese Communist Party

China’s Politburo Standing Committee

68 or older

Standing Committee

Xi Jinping

63

Li Keqiang

61

President

Premier

Zhang

Yu

Liu

Dejiang

70

Zhengsheng

Yunshan

69

Chairman,

71

Secretary,

National

Chairman,

Central

People’s

Chinese

Secretariat

Congress

People’s

Political

Consultative

Conference

Wang

Zhang

Qishan

69

Gaoli

70

Secretary,

Vice Premier

Central

Commission

for Discipline

Inspection

Source: Chinese Communist Party

Economy

China’s decades-long economic boom has helped the Communist Party’s rule endure well into the 21st century. Now, after accumulating worrying levels of debt to sustain smokestack industries, Chinese leaders are attempting to shift their priorities from growth to stability. Low government debt gives Xi plenty of fiscal grease to toss in the works, even as the central bank tightens the screws to rein in corporate debt.

China’s Economic Growth has Flattened

16%

14

12

10

8

6

4

2006

2016

China’s Economic Growth has Flattened

16%

14

12

10

8

6

4

2006

2016

China’s Economic Growth has Flattened

16%

14

12

10

8

6

4

2006

2016

China’s Economic Growth has Flattened

16%

14

12

10

8

6

4

2006

2016

Corporate Debt Has Soared as a Percentage of GDP

237%

19

22

41

160%

30 Banks

15 Governments

18 Households

165

105 Corporations

2005

2015

Corporate Debt Has Soared as a Percentage of GDP

237%

19

22

41

160%

30 Banks

15 Governments

18 Households

165

105 Corporations

2005

2015

Corporate Debt Has Soared as a Percentage of GDP

237%

19

22

41

160%

30 Banks

15 Governments

18 Households

165

105 Corporations

2005

2015

Corporate Debt Has Soared as a Percentage of GDP

237%

19

22

Banks

41

160%

Governments

30

Households

15

18

165

105

Corporations

2005

2015

Diplomacy

Trump is already giving Chinese diplomats headaches as he attacks Beijing’s currency practices and questions longstanding U.S. policy on the third-rail issue of Taiwan. Xi must calibrate his response. Show strength and keep nationalists happy at home? Or compromise to placate Trump and preserve international stability?

Pressure Points

Trump’s rise

complicates

China’s plans

for a bigger

global role

North Korea

is accelerating

its nuclear

weapons

development

Relations are

deteriorating

with Taiwan’s

new leader

Neighbors

are pushing

back against

South China

Sea claims

India, Myanmar

and Pakistan

pose security

challenges

NORTH

KOREA

Beijing

CHINA

PAKISTAN

INDIA

TAIWAN

South

China

Sea

MYANMAR

PHILIPPINES

VIETNAM

Pressure Points

Trump’s rise

complicates

China’s plans

for a bigger

global role

North Korea

is accelerating

its nuclear

weapons

development

Relations are

deteriorating

with Taiwan’s

new leader

Neighbors

are pushing

back against

South China

Sea claims

India, Myanmar

and Pakistan

pose security

challenges

NORTH

KOREA

Beijing

CHINA

PAKISTAN

INDIA

TAIWAN

South

China

Sea

MYANMAR

PHILIPPINES

VIETNAM

Pressure Points

North Korea

is accelerating its nuclear weapons

development

Relations are

deteriorating

with Taiwan’s

new leader

Neighbors

are pushing

back against

South China

Sea claims

India,

Myanmar

and Pakistan

pose security

challenges

Trump’s rise

complicates

China’s plans

for a bigger

global role

Beijing

NORTH

KOREA

CHINA

PAKISTAN

INDIA

TAIWAN

South

China

Sea

MYANMAR

PHILIPPINES

VIETNAM

Pressure Points

Beijing

NORTH

KOREA

CHINA

PAKISTAN

TAIWAN

INDIA

PHILIPPINES

MYANMAR

VIETNAM

Trump’s rise

complicates

China’s plans

for a bigger

global role

Relations are deteriorating with Taiwan’s

new leader

North Korea

is accelerating its nuclear

weapons

development

Neighbors

are pushing back against South China Sea claims

India, Myanmar and Pakistan pose security

challenges

Trade

Trump has blamed China for much of the decline of America’s manufacturing base. As the billionaire real estate developer and former “Apprentice” host seeks a more favorable deal on trade, Xi may need to jimmy open long-sheltered services industries, or use the crowbar to fight back if negotiations turn scrappy. China has a host of options for retaliation if Trump opens a trade war.

Trade Total

 

China

U.S.

$5,000B

4,000

3,000

2,000

1,000

0

1996

2015

Trade Total

 

China

U.S.

$5,000B

4,000

3,000

2,000

1,000

0

1996

2015

Trade Total

 

China

U.S.

$5,000B

4,000

3,000

2,000

1,000

0

1996

2015

Trade Total

 

China

U.S.

$5,000B

4,000

3,000

2,000

1,000

0

1996

2015

Trade Imports

 

Trade Exports

 

$2,500B

$2,500B

2,000

2,000

1,500

1,500

1,000

1,000

500

500

0

0

1996

2015

1996

2015

Trade Imports

 

Trade Exports

 

$2,500B

$2,500B

2,000

2,000

1,500

1,500

1,000

1,000

500

500

0

0

1996

2015

1996

2015

Trade Imports

 

$2,500B

2,000

1,500

1,000

500

0

1996

2015

Trade Exports

 

$2,500B

2,000

1,500

1,000

500

0

1996

2015

Trade Imports

 

$2,500B

2,000

1,500

1,000

500

0

1996

2015

Trade Exports

 

$2,500B

2,000

1,500

1,000

500

0

1996

2015

Currency

China’s currency is under increasing pressure from the greenback, with the Federal Reserve tightening monetary policy and Trump vowing to juice the U.S. economy with tax cuts and infrastructure spending. As Chinese savers rush to covert yuan to other currencies, the government may need to increase capital controls and spend down foreign exchange reserves to keep outflows from accelerating.

China’s Yuan Is Weakening Against the U.S. Dollar

¥6.0

6.2

Era of relative

yuan stability

China changes the way

it values yuan

6.4

China

devalues

yuan

6.6

6.8

7.0

1/2/2014

1/15/2015

1/4/2016

12/30/2016

China’s Yuan Is Weakening Against the U.S. Dollar

¥6.0

6.2

Era of relative

yuan stability

China changes the way

it values yuan

6.4

China

devalues

yuan

6.6

6.8

7.0

1/4/2016

1/2/2014

1/15/2015

12/30/2016

China’s Yuan Is Weakening Against the U.S. Dollar

¥6.0

6.2

China changes

the way it

values yuan

Era of relative

yuan stability

6.4

China

devalues

yuan

6.6

6.8

7.0

1/2/2014

12/30/2016

China’s Yuan Is Weakening Against the U.S. Dollar

¥6.0

6.2

Era of relative

yuan stability

6.4

China

devalues

yuan

6.6

China

changes

the way

it values

yuan

6.8

7.0

1/2/2014

12/30/2016

China’s Capital Outflows Since Early 2014

 

$100B

50

0

-50

-100

-150

-200

1/2016

 

 

1/2015

 

 

1/2014

 

11/2016

China’s Capital Outflows Since Early 2014

 

$100B

50

0

-50

-100

-150

-200

1/2016

 

 

1/2015

 

 

1/2014

 

11/2016

China’s Capital Outflows Since Early 2014

 

$100B

50

0

-50

-100

-150

-200

1/2014

 

11/2016

China’s Capital Outflows Since Early 2014

 

$100B

50

0

-50

-100

-150

-200

1/2014

11/2016

Environment

China’s increasingly wealthy middle class is worried about the quality of air it breathes and water it drinks and has become more vocal about complaints. With Beijing again cloaked in smog at the start of the year, Xi faces continued pressure to show he’s doing what it takes to clean things up.

China’s Air Has Among the Highest Levels of Fine Particulate Pollution in Asia*

Beijing

Seoul

CHINA

Shanghai

INDIA

Hong Kong

THAILAND

Manila

Bangkok

PHILIPPINES

MALAYSIA

Singapore

Low

High

INDONESIA

*Average PM2.5 in 2014

Source: World Health Organization

China’s Air Has Among the Highest Levels of Fine Particulate Pollution in Asia*

Beijing

Seoul

CHINA

Shanghai

INDIA

Hong Kong

THAILAND

Manila

Bangkok

PHILIPPINES

MALAYSIA

Singapore

Low

High

INDONESIA

*Average PM2.5 in 2014

Source: World Health Organization

China’s Air Has Among the Highest Levels of Fine Particulate Pollution in Asia*

Beijing

Seoul

CHINA

Shanghai

INDIA

Hong Kong

THAILAND

Manila

Bangkok

PHILIPPINES

MALAYSIA

Singapore

Low

High

INDONESIA

*Average PM2.5 in 2014

Source: World Health Organization

China’s Air Has Among the Highest Levels of Fine Particulate Pollution in Asia*

Beijing

Seoul

CHINA

Shanghai

INDIA

Hong Kong

THAILAND

Manila

Bangkok

PHILIPPINES

MALAYSIA

Singapore

Low

High

INDONESIA

*Average PM2.5 in 2014

Source: World Health Organization

Chinese tourists are going on lung-cleansing trips to escape smog

Reform

More efficient cities, better pensions, improved worker mobility and greater planning for demographic aging—these are what’s needed to sustain China’s momentum beyond 2017. Stoking growth in services and consumption is key to the economy’s transition, as is ensuring that 2017 runs to plan.

China’s Population Is Growing Older and More Urban

1982

Rural

Age

Urban

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

120M

0

0

120M

2010

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

90

-

94

95

-

99

100+

120M

0

0

120M

Source: United Nations

China’s Population Is Growing Older and More Urban

1982

Rural

Age

Urban

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

120M

0

0

120M

2010

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

90

-

94

95

-

99

100+

120M

0

0

120M

Source: United Nations

China’s Population Is Growing Older and More Urban

1982

Rural

Age

Urban

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

120M

0

0

120M

2010

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

90

-

94

95

-

99

100+

120M

0

0

120M

Source: United Nations

China’s Population Is Growing Older and More Urban

1982

Rural

Age

Urban

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

120M

0

0

120M

2010

0

-

4

5

-

9

10

-

14

15

-

19

20

-

24

25

-

29

30

-

34

35

-

39

40

-

44

45

-

49

50

-

54

55

-

59

60

-

64

65

-

69

70

-

74

75

-

79

80

-

84

85

-

89

90

-

94

95

-

99

100+

120M

0

0

120M

Source: United Nations