Daily Comment (July 22, 2016)

by Bill O’Grady and Kaisa Stucke

[Posted: 9:30 AM EDT] The GOP convention wrapped up last night; the Democrats hold theirs next week.  Financial markets are very quiet this morning, typical of the “dog days” of summer.  There were two items of note.  First, the flash PMI data from the U.K. was quite weak, with the July composite index tumbling to 47.7 from 52.4 in June.  This is the first major economic report since Brexit and it paints a weak picture.  In fact, the data suggest a recession could be underway.  The GBP dipped on the news as the weak data will tend to prompt the BOE to ease credit.

The second item of interest comes from the WSJ, which reports growing discord between General Secretary Xi and Premier Li over reforms to the Chinese State-Owned Enterprises (SOE).  On July 4th, Xi called for “stronger, bigger, better” SOEs with the CPC playing a central role in their management.  Li’s comments, issued about the same time, called on the SOEs to “slim down” and “follow market rules” in their restructuring.  Although we have been hearing reports of rising discord between the two leaders, these conflicting comments are perhaps the clearest evidence that Li and Xi are not on the same page.

Xi has systematically undermined Li’s authority and influence.  Xi is the president of China, the General Secretary of the CPC and commander in chief.  Li, as Premier, heads the cabinet within the Politburo and, at least traditionally, was in charge of economic policy.  However, Xi has created a set of ad hoc committees that answer only to him that have taken over many of the cabinet’s roles.  Xi’s supporters argue that corruption is so endemic that the president must take direct control.  Xi’s detractors suggest he is power-hungry and has taken on more tasks than he can effectively manage.

The tensions between Xi and Li are part of a deeper divide within the CPC. Xi is a “princeling” whose family lineage includes important founding revolutionaries.  Li comes from a more humble background, rising from the other source of power, the Communist Youth League (CYL).  The CYL is how those from the countryside rise to levels of influence.  Princelings tend to support economic growth at the expense of equality; CYL leaders tend to focus on growth in the interior of the country and equality.

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