Li Keqiang’s death heaps pressure on Beijing to reform

The sudden passing of the former premier and Xi Jinping critic comes at a terrible time for the president

China’s leadership is hard at work trying to boost the economy and resolve issues standing in the way of recovery. One major hindrance has been provincial debt and sluggish local economic activity.

Until recently, however, the government of President Xi Jinping had largely ignored local government finances. This changed dramatically early last week when Beijing announced the issuance of $137 billion in government bonds to help local governments.

Though this was meant to relieve pressure on the central government, the sudden death of former Premier Li Keqiang – who advocated precisely these steps during his tenure – may pressure Beijing into doing more economic reform than it had intended.

Competing Economic Visions

In China, the rural provinces of the interior have always been less wealthy and stable – and thus more in need of financial support – than the coastal areas. For decades, Chinese leaders have tried and failed to narrow the wealth gap. Not long after he came to power in 2013, Xi presented his own two-step plan to tackle inequality, which began with an intense and lengthy crackdown on the big tech companies clustered along the coast but never advanced to the redistribution phase.

Instead, Xi used the funds extracted from the coast to prop up the ailing real estate and financial sectors. In the meantime, the fiscal situation for local governments, particularly in the interior, has worsened. Now, Xi seems to be reconsidering his approach, drawing on the advice of the late Li to focus on the left-behind areas of the country.

Though Li was a well-liked figure who held prestigious government posts, in recent years his rivalry with Xi and open criticisms of Xi’s policies diminished his influence, culminating in his removal from the senior leadership and exit from politics in March 2023.

The last time he was in the spotlight was a few weeks before his departure as premier, when he submitted his final government report. It called for more financial support for local governments, especially the poorer rural provinces, and criticized Xi’s failure to redistribute the proceeds of the crackdown on big tech.

His advice apparently fell on deaf ears in the Politburo Standing Committee, but in death Li has become a celebrated symbol of China’s better years, especially among young Chinese who are disillusioned with their economic prospects.

Unlike most figures who make it to the seven-member Standing Committee, Li was a liberal whose views on the economy were often more closely aligned with those in the West. He rose to political prominence around the same time as Xi and was rumored to be a challenger for the presidency.

For reasons unknown, he did not run for the post and instead concentrated on things he found problematic in China’s political system. Around 2007, he began looking at local governments, convinced that the financial situations and growth prospects of the interior provinces were not as positive as their gross domestic product indicated. During personal visits to these provinces, he identified issues with infrastructure that he thought would hinder attempts at wealth redistribution. He proposed investing to improve existing trade connections between provinces and build new ones.

More important, he recommended more financial support for local governments, paying special attention to small rural banks. Then-President Hu Jintao adopted many of his proposals, but they were not taken as seriously by Xi, who thought Li overestimated the importance of addressing the provinces’ individual needs. As China’s economic problems grew, Xi ceased financial support to local governments entirely.

Li became premier in 2013, the same year Xi started his first term as president. Their first five-year term came and went without any major rifts between them, though Xi and his circle of loyalists began to resent Li for his frequent exchanges with American economists, including private exchanges in which he sought their advice on addressing China’s wealth inequality. These secret conversations were irreconcilable with Xi’s approach, which included shutting out the U.S. and pursuing economic growth in a “purely Chinese way.”

Their relationship worsened during their second term, especially when the COVID-19 pandemic struck in late 2019 and early 2020. As China’s GDP growth slowed to levels not seen in generations, the leadership needed to decide which sectors or regions to target with support.

Xi opted to crack down on corruption among big tech firms and to redistribute their wealth to China’s poorer regions, but his plans were derailed by the country’s creaking real estate sector and banking system. Despite Li’s repeated warnings, local governments were ignored, with Xi saying that the central leadership was focused on defeating the

pandemic and that local governments should “work hard to support themselves.”

Gradually, Li became more critical of Xi and his decisions – not only his neglect of local governments but also the tech crackdown and harsh zero-COVID policy – joining the unofficial ranks of the opposition within the Politburo.

Led by party officials affiliated with coastal businesses, these opposition figures advocated a reversal of Xi’s big tech crackdown and government support for China’s wealthier regions to boost foreign trade.

Li’s focus was on the poorer regions, but he tempered his calls to support them at the expense of the coastal areas as he came to believe that foreign investment and trade were key to reversing the country’s economic downturn.

Xi and Li’s rivalry intensified as the former committed to his agenda and became increasingly wary of critical voices. At the October 2022 Party Congress, Xi removed the most prominent opponents from his Cabinet. Li remained in his position temporarily, but rumors spread that he was planning to leave politics completely. After Li’s mentor Hu Jintao was filmed being escorted out of the congress, it was clear that Li’s time was running out as well.

The Dangers of Nostalgia

Shortly after news broke of Li’s sudden passing on October 27, users flooded Chinese social media with some of his popular quotes and expressed nostalgia for China’s “miracle days.” Young Chinese especially have been feeling hopeless about their futures amid record youth unemployment.

Some of his supporters called attention to the banking crisis in Henan in July 2022 as a prime example of the consequences of Xi’s decision to ignore rural provinces. The situation in the interior has only worsened since then amid an extremely hot summer and the failure of several small banks.

The government’s response was swift. Over the weekend, it censored lengthy social media posts praising Li, and most universities banned students from holding events to mourn his death. Evidently, Xi deemed comparisons between himself and Li to be a threat to his authority and feared a youth-led revolt. There is even some unsubstantiated speculation that the government had a hand in Li’s sudden death.

A few days before Li’s death, the National People’s Congress raised local governments’ budget deficit ratio to 3.8 percent, well above the 3% target set in March, which at the time was considered a red line.

It was exactly the sort of move that Li had repeatedly proposed over the years.

Given that Beijing is also finally supporting big tech again, it appears that Xi may have abandoned his unfulfilled wealth redistribution strategy for the freer market approach that Li endorsed. China’s legislature also passed a bill to allow local governments to frontload part of their 2024 bond quota to support investment and expand domestic demand – another decision that could have been taken years ago.

The fact that the economy picked up momentum in August may have given the government the confidence to implement these measures, but GDP growth also rebounded after the first wave of COVID-19 – when Li was still in office, making very similar recommendations – but nothing was done.

The new local government support measures, which reportedly will be tailored to each province, are probably China’s biggest economic reform in years. One way or another, it seems the Chinese government is finally heeding Li’s advice.

Viktoria Herczegh is an analyst at Geopolitical Futures.