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August 22, 2017

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To preserve authority, Xi can't afford 2nd-term economic slowdown

The Chinese Communist Party's National Congress, which gathers once every five years, will meet this autumn. For the administration of President Xi Jinping, which is entering its second term, failure to manage the economy would cripple its standing. Even if it smoothly navigates the 19th National Congress, there could very well be lingering anxieties.

The operation of a new model of high-speed train between Beijing and Shanghai began in late June. The model running the line was named "Fuxing" (Rejuvenation) after Xi's slogan of the "great rejuvenation of the Chinese nation."

Xi enhances his image through any means possible. There is no doubt that economic policy requires scrupulous management, especially this year against the backdrop of a national congress. Under the Communist Party's single-party rule, China's politics and economics have become closely intertwined.

An important party meeting commenced early this month in Beidaihe, a summer resort town in Hebei Province, where party leaders like Xi and Premier Li Keqiang meet annually with retired party elders. The leadership roster for Xi's second term will naturally dominate the agenda this year. But another major topic will likely be the current economic situation and policies for the second half of the year.

Financial risk

The Xi administration's top priority is minimizing financial risk. In June 2015, stock prices tanked, which precipitated a plunge in the yuan.

When the People's Bank of China decided to cut rates in November 2014 for the first time in two years and four months, investment funds flowed from the sluggish real estate market to equities. Government and official media recommended investing in stocks, triggering a sharp rise in the number of individual investors. The equities bubble, which expanded at a faster pace than the real economy, ended in the 2015 collapse.

If there is turmoil in the financial markets this year, Xi will lose face as supreme leader, which would severely undermine his authority and ability to drive an agenda.

Since last year, Xi's government has focused on tightening measures against real estate investment. It continues to take steps such as raising mortgage interest rates and strengthening restrictions on the resale of houses.

Behind the tightening measures, there is believed to be increased concern about asset bubbles, such as a spike in real estate prices, and hikes in U.S. interest rates.

"Although there are certainly risks at present, they can be controlled on the whole." In late June, Premier Li spoke at the World Economic Forum held in Dalian, Liaoning Province, where he announced a continuation of his tightening policy.

He also stated that "the main goal for the year as a whole can be fully realized," predicting that this year's growth target of "around 6.5 percent" can be achieved. For the Xi regime, achieving this year's goal is critically important.

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