Li’s first news conference as premier, at the close of the annual meeting of China’s rubber-stamp parliament that confirmed his appointment, covered topics that have been the principal focus of recent government rhetoric, with a strong emphasis on the necessity of reform to deliver long-term economic stability.

“The highest priority will be to maintain sustainable economic growth,” Li said at the start of the conference that lasted almost two hours and in which he repeatedly stressed the need for economic, social and government reform.

“The key is to have economic transformation. We need to combine the dividends of reform, the potential of domestic demand and the vitality of creativity so that these together will form new drivers of economic growth,” he added.

“We said that in pursing reform we now have to navigate uncharted waters. We may also have to confront some protracted problems. This is because we will have to shake up vested interests,” said Li, looking relaxed and repeatedly gesturing with his hands.

“Sometimes stirring vested interests may be more difficult that stirring the soul, but however deep the water may be, we will wade into the water. This is because we have no alternative. Reform concerns the destiny of our country and the future of our nation.”

Ting Lu, chief China economist at Bank of America/Merrill Lynch in Hong Kong, said in a note to clients that the pro-reform tone of the speech would go down well with investors.

“He understood very well that key barriers for reforms are vested interests rather than ideology,” Lu said.

But beyond a specific pledge to cut administrative red tape on some 1,700 processes needing government approval by at least a third, Li’s answers to the 11 pre-arranged questions he took from journalists offered no new policy initiatives.

However, he said that planned reform of the controversial system of forced labor camps would come by the end of the year.

REFORM PLEDGES

The premier pledged to reform capital markets, the currency and fight China’s pervasive corruption crisis, saying that government officials, having chosen public life, should give up thoughts of riches.

Li said China’s broad reform effort would also lead to improvements in environmental controls, cutting pollution in the atmosphere and raising food and water safety standards.

A growing environmental awareness and willingness of urban people to voice concern about industrial pollution have led the ruling Communist Party to worry about the risk of yet more protests that could undermine social order.

Similar worries exist in the leadership about growing discontent over inequality in China, which has one of the world’s widest gaps between rich and poor and which has now reached levels which the government fears could spark unrest.

Li reiterated commitments to reform income distribution, improve access to social security and health care and allow welfare benefits to be paid nationwide, regardless of the official residence of the claimant.

China’s rigid residence registration, or hukou, system broadly classifies citizens as urbanites or farmers and precludes people from access to basic welfare services outside their official residence area.

Economists say it is a crucial obstacle to rebalancing China’s economy away from the investment-heavy, export-oriented model that has lifted hundreds of millions of people from poverty, turned China into the world’s biggest trading economy and has been a policy priority for much of the last decade.

Despite its ranking as the second-largest economy globally after three decades of stellar growth, China remains an aspiring middle-income country riven with inequality and dependent on state-backed investment.

About 13 percent of China’s population still live on less than $1.25 per day, the United Nations Development Programme says. Average urban disposable income is just 21,810 yuan ($3,500) a year.

On the other hand, according to the latest reckoning by Forbes, China has 122 dollar billionaires. A rival list in the Hurun Report says China has 317 billionaires – a fifth of the total number in the world.

CYBER-SNIPING

Li shrugged off an assertion from one questioner that China was responsible for hacking into U.S. computer systems, restated Beijing’s complaint that it too had been under cyber-attack.

“I think we should not make groundless accusations against each other, and spend more time doing practical things that will contribute to cyber-security,” Li said.

President Barack Obama also raised U.S. concerns about computer hacking in a phone call with Chinese President Xi Jinping last week on the day Xi took office.

U.S. Treasury Secretary Jack Lew will likely press China to investigate and stop cyber-attacks on U.S. companies and other entities when he visit China this week for discussions on a range of economic issues.

Li, 57, officially took over as premier on March 15 from Wen Jiabao whose 10 years in charge is increasingly regarded by analysts as a lost decade in which economic reform slowed and state-backed businesses tightened their grip on the country’s new-found wealth.

Li, as head of the State Council, or cabinet, is charged with executing government policy and overseeing an economy in which growth slowed to a 13-year low in 2012, albeit at a 7.8 percent rate that is the envy of other major economies.

More than any other Chinese party leader until now, Li was immersed in the intellectual and political ferment of the decade of reform under Deng Xiaoping, which ended in the 1989 Tiananmen Square protests that were crushed by troops.

As a student at the elite Peking University, Li befriended ardent pro-democracy advocates, some of whom later became outright challengers to party control. His friends included activists who went into exile after the June 1989 crackdown.

Li drew on his own experiences of rural poverty in the aftermath of Mao Zedong’s Cultural Revolution, which forced intellectuals, industrialists and urbanites to leave cities to work on farms, to explain his drive to deliver a better economic deal to China’s 1.3 billion people, most of whom are poor.

“I was a sent-down youth in Anhui province’s Fengyang County and I will not forget the hard times I spent with the local farmers,” Li said.

“Reform and opening up have changed the destiny of our country and lifted hundreds of million of farmers out from poverty. It has also changed the life course of many people, including me. Now the heavy responsibility of reform has fallen on the shoulders of our generation.”

(Additional reporting by Ben Blanchard, Terril Yue Jones, Jonathan Standing and Sui-Lee Wee; Writing by Nick Edwards; Editing by Nick Macfie)

Li’s first news conference as premier, at the close of the
annual meeting of China’s rubber-stamp parliament that confirmed
his appointment, covered topics that have been the principal
focus of recent government rhetoric, with a strong emphasis on
the necessity of reform to deliver long-term economic stability.

“The highest priority will be to maintain sustainable
economic growth,” Li said at the start of the conference that
lasted almost two hours and in which he repeatedly stressed the
need for economic, social and government reform.

“The key is to have economic transformation. We need to
combine the dividends of reform, the potential of domestic
demand and the vitality of creativity so that these together
will form new drivers of economic growth,” he added.

“We said that in pursing reform we now have to navigate
uncharted waters. We may also have to confront some protracted
problems. This is because we will have to shake up vested
interests,” said Li, looking relaxed and repeatedly gesturing
with his hands.

“Sometimes stirring vested interests may be more difficult
that stirring the soul, but however deep the water may be, we
will wade into the water. This is because we have no
alternative. Reform concerns the destiny of our country and the
future of our nation.”

Ting Lu, chief China economist at Bank of America/Merrill
Lynch in Hong Kong, said in a note to clients that the
pro-reform tone of the speech would go down well with investors.

“He understood very well that key barriers for reforms are
vested interests rather than ideology,” Lu said.

But beyond a specific pledge to cut administrative red tape
on some 1,700 processes needing government approval by at least
a third, Li’s answers to the 11 pre-arranged questions he took
from journalists offered no new policy initiatives.

However, he said that planned reform of the controversial
system of forced labour camps would come by the end of the year.

REFORM PLEDGES

The premier pledged to reform capital markets, the currency
and fight China’s pervasive corruption crisis, saying that
government officials, having chosen public life, should give up
thoughts of riches.

Li said China’s broad reform effort would also lead to
improvements in environmental controls, cutting pollution in the
atmosphere and raising food and water safety standards.

A growing environmental awareness and willingness of urban
people to voice concern about industrial pollution have led the
ruling Communist Party to worry about the risk of yet more
protests that could undermine social order.

Similar worries exist in the leadership about growing
discontent over inequality in China, which has one of the
world’s widest gaps between rich and poor and which has now
reached levels which the government fears could spark unrest.

Li reiterated commitments to reform income distribution,
improve access to social security and health care and allow
welfare benefits to be paid nationwide, regardless of the
official residence of the claimant.

China’s rigid residence registration, or hukou, system
broadly classifies citizens as urbanites or farmers and
precludes people from access to basic welfare services outside
their official residence area.

Economists say it is a crucial obstacle to rebalancing
China’s economy away from the investment-heavy, export-oriented
model that has lifted hundreds of millions of people from
poverty, turned China into the world’s biggest trading economy
and has been a policy priority for much of the last decade.

Despite its ranking as the second-largest economy globally
after three decades of stellar growth, China remains an aspiring
middle-income country riven with inequality and dependent on
state-backed investment.

About 13 percent of China’s population still live on less
than $1.25 per day, the United Nations Development Programme
says. Average urban disposable income is just 21,810 yuan
($3,500) a year.

On the other hand, according to the latest reckoning by
Forbes, China has 122 dollar billionaires. A rival list in the
Hurun Report says China has 317 billionaires – a fifth of the
total number in the world.

CYBER-SNIPING

Li shrugged off an assertion from one questioner that China
was responsible for hacking into U.S. computer systems, restated
Beijing’s complaint that it too had been under cyber-attack.

“I think we should not make groundless accusations against
each other, and spend more time doing practical things that will
contribute to cyber-security,” Li said.

President Barack Obama also raised U.S. concerns about
computer hacking in a phone call with Chinese President Xi
Jinping last week on the day Xi took office.

U.S. Treasury Secretary Jack Lew will likely press China to
investigate and stop cyber-attacks on U.S. companies and other
entities when he visit China this week for discussions on a
range of economic issues.

Li, 57, officially took over as premier on March 15 from Wen
Jiabao whose 10 years in charge is increasingly regarded by
analysts as a lost decade in which economic reform slowed and
state-backed businesses tightened their grip on the country’s
new-found wealth.

Li, as head of the State Council, or cabinet, is charged
with executing government policy and overseeing an economy in
which growth slowed to a 13-year low in 2012, albeit at a 7.8
percent rate that is the envy of other major economies.

More than any other Chinese party leader until now, Li was
immersed in the intellectual and political ferment of the
decade of reform under Deng Xiaoping, which ended in the 1989
Tiananmen Square protests that were crushed by troops.

As a student at the elite Peking University, Li befriended
ardent pro-democracy advocates, some of whom later became
outright challengers to party control. His friends included
activists who went into exile after the June 1989 crackdown.

Li drew on his own experiences of rural poverty in the
aftermath of Mao Zedong’s Cultural Revolution, which forced
intellectuals, industrialists and urbanites to leave cities to
work on farms, to explain his drive to deliver a better economic
deal to China’s 1.3 billion people, most of whom are poor.

“I was a sent-down youth in Anhui province’s Fengyang County
and I will not forget the hard times I spent with the local
farmers,” Li said.

“Reform and opening up have changed the destiny of our
country and lifted hundreds of million of farmers out from
poverty. It has also changed the life course of many people,
including me. Now the heavy responsibility of reform has fallen
on the shoulders of our generation.”

The largely rubber-stamp National People’s Congress, or parliament, will name the four vice premiers and cabinet ministers in a tightly scripted ceremony at the Great Hall of the People in Beijing on Saturday.

Wang made his name as the party boss of the export powerhouse of Guangdong province in south China, where he pushed for social and political reform. Despite later toning down his reformist agenda, he missed out on a seat on the seven-member Politburo Standing Committee, the apex of power in China, at the party congress in November amid concerns of elders that he was too liberal.

At 58, Wang will be the youngest of the vice premiers, who assist Premier Li Keqiang run the world’s second biggest economy, four independent sources said. Wang will be the third-ranked vice premier.

Zhang Gaoli, 66, who eked into the standing committee, will become No. 1 vice premier and help oversee the financial sector, said the sources, two of whom have ties to the leadership.

Liu Yandong, 67, will be the second-ranked vice premier and be responsible for culture, education, health and sports, the sources said, requesting anonymity to avoid repercussions for discussing secretive elite politics with foreign media.

Ma Kai, 66, one-time state planner, will be the fourth- ranked vice premier, the sources said.

Liu, Wang and Ma are members of the party’s 25-member Politburo, one notch below the standing committee.

The sources were divided over whether the country’s agriculture ministry, which reports to a vice premier, will be overseen by Wang or Ma. The other portfolios up for grabs will be industry, transport, production safety, state assets, telecommunications and railways.

Whoever gets the agriculture portfolio will have to try to steer through policies aimed at transforming China’s sprawling agricultural sector and improving long-term food security.

China plans to spend 40 trillion yuan ($6.4 trillion) to bring 400 million people to cities over the next decade to turn the country into a wealthy world power with economic growth generated by affluent urban consumers.

“Li Keqiang is pushing for urbanization. The countryside will be the main battlefield,” one source with leadership ties told Reuters.

China needs to bring in the commercial and technological wherewithal that will allow its farms to feed an increasingly rich and urban population, even in the face of declining water supplies, land and rural labor.

But the vice premier overseeing agriculture will also need to ensure that the central government treads carefully, encouraging the transfer of land and the creation of advanced agribusinesses while addressing a widening urban-rural wage gap and protecting the interests of millions of small, subsistence farmers throughout the country.

Wang has experience dealing with rural protests against land grabs, winning praise for deftly handling a crisis in the coastal village of Wukan in Guangdong in 2011, but observers have said his instinct for reform has usually been frustrated.

Zheng Fengtian, a professor with the school of agricultural economics and rural development at Renmin University in Beijing, said the leader responsible for agriculture would likely have his hands tied.

“I think the new leader will continue the current agricultural policy mapped out by the (party’s) previous Central Committee and the State Council (cabinet), which have clearly outlined ideas on agriculture development,” he said.

“The key issue is urbanization and I hardly expect any breakthrough beyond what has already been talked about.”

Saturday’s parliamentary session will also decide who will take over a number of key government ministries.

The sources said two front runners have emerged to take over as chairman of China’s powerful state planner, the National Development and Reform Commission, including current vice-chairman Xie Zhenhua, also the country’s chief climate change official, and Xu Shaoshi, the minister of land and resources.

Current vice-minister Pan Yue remains the main candidate to take over as minister of environmental protection, but incumbent Zhou Shengxian might stay on, the sources said.

(Additional reporting by Niu Shuping; Editing by Raju Gopalakrishnan)

Li’s appointment would be a sign that new Communist Party leader and incoming president Xi Jinping’s clout is growing, a source with ties to the leadership said. Xi fended off a bid by influential former president Jiang Zemin to install propaganda tsar Liu Yunshan in the job, the source said.

Jiang was a major power behind the scenes in the administration of outgoing President Hu Jintao.

The post of vice president is largely symbolic. However the job would raise Li’s profile, give him a role in foreign affairs and further bolster Xi, who took the top jobs in the party and military at the Communist Party congress in November.

The promotion of Li may also signal a willingness on the part of Xi to pursue limited reforms that Li is known to have advocated in his previous posts, such as making the selection of Communist officials more inclusive.

Leadership changes in China are thrashed out behind closed doors through horse-trading between new leaders and outgoing or retired leaders anxious to preserve their influence and protect family interests, but reshuffles must go through a choreographed selection process.

Two other sources, who declined to be identified because it is sensitive to discuss elite politics with foreign media, also confirmed that Xi had decided to make Li his vice president rather than Liu.

The National People’s Congress, China’s rubber-stamp parliament, will vote in Xi and Li as president and vice president respectively on March 14. Li Keqiang, the party’s new No.2 official, will succeed Wen Jiabao to become premier and oversee the economy and day-to-day running of the cabinet.

“Li Yuanchao will be vice president, not Liu Yunshan,” the source with leadership ties said.

“It was Xi’s decision and a sign he is strong and able to say ‘no’ to Jiang,” the source told Reuters.

CONSOLATION PRIZE

In November, Liu was promoted to the seven-man Politburo standing committee with responsibility for propaganda and ideology. He has also taken over two of Xi’s previous positions: president of the Central Party School, which grooms up-and-coming cadres, and top seat on the Secretariat of the party’s elite 205-member Central Committee.

Liu served as propaganda minister from 2002 to 2012, keeping a tight leash on domestic media and China’s Internet, which has more than 500 million users.

His rival, Li, had been widely considered a top contender for a spot on the standing committee in November but party elders led by Jiang used a last-minute straw poll to block him from joining the body, sources have said.

The vice presidential appointment “in part is compensation for him not getting into the Politburo standing committee”, said Guo Liangping, a Chinese politics expert at the National University of Singapore’s East Asia Institute.

“That position has high exposure to the world, it’s high profile, probably more prestigious, but in terms of real power it’s limited.”

If Li makes it, it would mark the first time since 1998 that the vice president is not a member of the standing committee – the apex of power in China. Li sits on the 25-member Politburo, one notch below the standing committee.

But both Li and Liu are too old to be potential successors to Xi.

“This time it’s kind of a holding position,” said Kerry Brown, executive director of the China Studies Centre at the University of Sydney.

Li has been regarded as progressive for advocating incremental reforms in how the party promotes officials and consults the populace on policies, but how much influence he has as vice president will be, to a large degree, decided by Xi.

“If Xi wants a pro-active, tightly-allied kind of vice president, then the vice president will have power. If he wants a purely symbolic figure who is there to do absolutely nothing, then that’s what the vice president will do,” said Brown.

The vice presidency was created by a change to the constitution in 1982. President Hu served in that role from 1998 to 2003 which formally anointed him as heir apparent to Jiang. Xi also served in that role from 2008 until the present.

The duties of the vice president include assisting the president and taking over the presidency in the event the president resigns or dies in office.

Li, a “princeling” whose father was a former vice mayor of Shanghai, earned mathematics and economics degrees from two of China’s best universities and has a doctorate in law. He also spent time at Harvard University’s Kennedy School of Government.

(Editing by Raju Gopalakrishnan)

Securities regulator Guo Shuqing is tipped to take the helm at the $482 billion state investment vehicle, China Investment Corp (CIC) CIC.UL, and China’s chief trade representative, Gao Hucheng, is seen running the Commerce Ministry, two sources with leadership ties told Reuters.

The appointment of seasoned, English-speaking financial negotiators to run the two agencies is a sign that China’s new leaders would make commercial logic a major thrust of the push for market access Beijing needs for planned acquisitions of $560 billion of overseas assets in the five years to end-2015.

“The next government will pay more attention to trade policy and investment policy and the direction will be more open,” said Tu Xinquan, associate director at the China Institute of WTO Studies at the University of International Business and Economics in Beijing.

Sources with ties to the leadership and officials at China’s top ministerial think-tanks say the change of personnel reflects the focus President-in-waiting Xi Jinping and Premier-designate Li Keqiang have on furthering China’s ambitions in the global economy. Academics said such appointments fit with the overall external thrust of China’s new leadership.

“Here you have people who know the global system, and this is about China becoming much more active in it,” said Scott Kennedy, director of the Research Center for Chinese Politics & Business at Indiana University.

BALANCED APPROACH

Guo has climbed to the top of China’s financial ranks by sticking to a formula combining a balanced approach to risk with gradual reform. His favorite proverb – “Listen to both extremes and take the middle course” – speaks volumes about the approach the former chairman of China Construction Bank (CCB) (601939.SS: Quote, Profile, Research, Stock Buzz) (0939.HK: Quote, Profile, Research, Stock Buzz) took to managing the world’s second-most valuable financial institution.

“Don’t take too much risk. But not too little either. If you don’t take any risk how can you make any money,” the 56-year old quipped in an interview with Reuters in 2010.

The philosophy major and Oxford-educated scholar, who speaks English fluently, has moved easily between academia, government and a rapidly growing commercial sector that has helped China become the world’s second-biggest economy.

He joined CCB as chairman in 2005 after a $22.5 billion bailout left the State Administration of Foreign Exchange, which Guo headed, as the bank’s largest shareholder. Seven months after Guo took over, CCB sold shares publicly for the first time in Hong Kong and two years later in Shanghai – China’s first state-owned lender to float shares in both bourses.

“The financial markets are generally quite positive on Guo, because he’s got a track record of delivering on his promises,” said Stanley Li, an analyst at Mirae Asset Securities in Hong Kong who has met Guo a number of times. “A reformer who is able to deliver is actually rare in China, as you tend to get people who talk a lot but can’t deliver, or you get those who just don’t want to rock the boat.”

Gao has been in charge of China’s global trade negotiations since 2010, and his years of experience as a trade negotiator could elevate the Commerce Ministry’s role in policy battles, sources say.

The 61-year old, who didn’t join the Communist Party until his late 30s, worked at the ministry’s predecessor – the Ministry of Foreign Trade and Economic Cooperation – beginning in the early 1990s. Currently the longest serving of the Commerce Ministry’s vice ministers, Gao studied abroad, worked in Africa, and earned his doctorate in sociology in Paris, according to his official biography.

SWEEPING RESHUFFLE

The likely appointments are part of a sweeping redistribution of top financial posts that will take place during the annual 2-week full session of parliament that began on Tuesday.

If Guo takes the CIC job, he would replace Lou Jiwei, 62, who is tipped to become finance minister, the sources said, adding that insurance regulator Xiang Junbo, 56, is the front-runner to succeed Guo as securities regulator.

Lou will succeed Xie Xuren, who is the front-runner to become chairman of the National Social Security Fund, which manages the national pension fund that stood at 18.3 trillion yuan ($2.94 trillion) as of mid-June 2012. Xie is tipped to replace Dai Xianglong, 68, who will retire.

Xie has reached the compulsory retirement age of 65 for cabinet ministers and was left out of the Communist Party’s elite 205-member Central Committee during a once-in-a-decade handover of party power last November because he offended many powerful interest groups.

“Xie Xuren (as finance minister) rarely dined out. And when he did, he would pay his own way, embarrassing his host and fellow guests,” said one financial industry source with direct knowledge of Xie’s style.

The securities regulatory body, the sovereign wealth fund, the Finance Ministry and the social security fund declined immediate comment on the planned personnel changes. Guo, Lou and Xie could not be reached.

Reuters reported last week that central bank governor Zhou Xiaochuan is set to keep his job for an unspecified period, despite being aged 65, as the country’s leaders seek to maintain the momentum of financial reform. He would be made a vice chairman of parliament’s advisory body, giving him “national-level leader” rank that would exempt him from compulsory retirement, sources have said.

Like Zhou, Chen Yuan, 68, is likely to be appointed a vice chairman of the advisory body, the sources said, adding that Chen would stay on as chairman of China Development Bank CHDB.UL, the sources said. In its role as a policy bank, state-owned CDB lends to China’s largest infrastructure projects and offers financial aid for the country’s industrial giants to internationalize.

The Commerce Ministry is seen as one of the Chinese agencies most amenable to broader reforms, which could give Gao’s appointment broader implications, said Tu, the professor.

That is significant given Beijing’s growing interest in owning physical assets in the economies where China has a steady income from trade which could be used to fund purchases. That approach achieves twin goals of balancing capital flows and reducing exposure to paper assets from the United States and Europe, which analysts say China’s top policymakers have tired of.

STRATEGY SHIFT

Beijing has watched for three years as Europe’s crisis has choked growth and demand in China’s biggest export market and stoked default risks on the near $800 billion of euro zone government bonds China is estimated to own as part of its $3.3 trillion of foreign exchange reserves.

Meanwhile, record low yields on U.S. Treasuries and a depreciating dollar have seen the value of China’s dollar holdings fall by a third in the last 10 years, adding weight to Beijing’s view that the time is ripe to change investment tack.

If China can engineer a rise in cross-border corporate merger and acquisition activity, it could take some of the political sting out of the rebalancing flows. But the reluctance of foreign governments to accept the acquisition of stakes in strategic assets by entities ultimately controlled by China’s Communist Party, and a patchy track record in dealmaking, have led to frustrations.

The long delays to approving the record $15.1 billion takeover of Canadian oil and gas company Nexen by Chinese state-owned oil major CNOOC Ltd 00883.HK – the deal finally closed in February after seven months – offer a typical example.

Outbound China deals ran into trouble everywhere from Iceland to Myanmar in 2011, including a $5.4 billion PetroChina (601857.SS: Quote, Profile, Research, Stock Buzz) deal in Canada, a $7 billion CNOOC (0883.HK: Quote, Profile, Research, Stock Buzz) transaction in Argentina and Bright Food Group’s SHMNGA.UL $2.5 billion bid to buy French yoghurt maker Yoplait. The United States regularly objects to Chinese takeovers on the grounds of national security.

($1 = 6.2181 Chinese yuan)

(Additional reporting by Victoria Bi, Lucy Hornby, Huang Yan and Aileen Wang; Writing by Nick Edwards; Editing by Ian Geoghegan)

Securities regulator Guo Shuqing is tipped to take the helm
at the $482 billion state investment vehicle, China Investment
Corp (CIC), and China’s chief trade representative, Gao
Hucheng, is seen running the Commerce Ministry, two sources with
leadership ties told Reuters.

The appointment of seasoned, English-speaking financial
negotiators to run the two agencies is a sign that China’s new
leaders would make commercial logic a major thrust of the push
for market access Beijing needs for planned acquisitions of $560
billion of overseas assets in the five years to end-2015.

“The next government will pay more attention to trade policy
and investment policy and the direction will be more open,” said
Tu Xinquan, associate director at the China Institute of WTO
Studies at the University of International Business and
Economics in Beijing.

Sources with ties to the leadership and officials at China’s
top ministerial think-tanks say the change of personnel reflects
the focus President-in-waiting Xi Jinping and Premier-designate
Li Keqiang have on furthering China’s ambitions in the global
economy. Academics said such appointments fit with the overall
external thrust of China’s new leadership.

“Here you have people who know the global system, and this
is about China becoming much more active in it,” said Scott
Kennedy, director of the Research Center for Chinese Politics &
Business at Indiana University.

BALANCED APPROACH

Guo has climbed to the top of China’s financial ranks by
sticking to a formula combining a balanced approach to risk with
gradual reform. His favourite proverb – “Listen to both extremes
and take the middle course” – speaks volumes about the approach
the former chairman of China Construction Bank (CCB)
took to managing the world’s second-most valuable
financial institution.

“Don’t take too much risk. But not too little either. If you
don’t take any risk how can you make any money,” the 56-year old
quipped in an interview with Reuters in 2010.

The philosophy major and Oxford-educated scholar, who speaks
English fluently, has moved easily between academia, government
and a rapidly growing commercial sector that has helped China
become the world’s second-biggest economy.

He joined CCB as chairman in 2005 after a $22.5 billion
bailout left the State Administration of Foreign Exchange, which
Guo headed, as the bank’s largest shareholder. Seven months
after Guo took over, CCB sold shares publicly for the first time
in Hong Kong and two years later in Shanghai – China’s first
state-owned lender to float shares in both bourses.

“The financial markets are generally quite positive on Guo,
because he’s got a track record of delivering on his promises,”
said Stanley Li, an analyst at Mirae Asset Securities in Hong
Kong who has met Guo a number of times. “A reformer who is able
to deliver is actually rare in China, as you tend to get people
who talk a lot but can’t deliver, or you get those who just
don’t want to rock the boat.”

Gao has been in charge of China’s global trade negotiations
since 2010, and his years of experience as a trade negotiator
could elevate the Commerce Ministry’s role in policy battles,
sources say.

The 61-year old, who didn’t join the Communist Party until
his late 30s, worked at the ministry’s predecessor – the
Ministry of Foreign Trade and Economic Cooperation – beginning
in the early 1990s. Currently the longest serving of the
Commerce Ministry’s vice ministers, Gao studied abroad, worked
in Africa, and earned his doctorate in sociology in Paris,
according to his official biography.

SWEEPING RESHUFFLE

The likely appointments are part of a sweeping
redistribution of top financial posts that will take place
during the annual 2-week full session of parliament that began
on Tuesday.

If Guo takes the CIC job, he would replace Lou Jiwei, 62,
who is tipped to become finance minister, the sources said,
adding that insurance regulator Xiang Junbo, 56, is the
front-runner to succeed Guo as securities regulator.

Lou will succeed Xie Xuren, who is the front-runner to
become chairman of the National Social Security Fund, which
manages the national pension fund that stood at 18.3 trillion
yuan ($2.94 trillion) as of mid-June 2012. Xie is tipped to
replace Dai Xianglong, 68, who will retire.

Xie has reached the compulsory retirement age of 65 for
cabinet ministers and was left out of the Communist Party’s
elite 205-member Central Committee during a once-in-a-decade
handover of party power last November because he offended many
powerful interest groups.

“Xie Xuren (as finance minister) rarely dined out. And when
he did, he would pay his own way, embarrassing his host and
fellow guests,” said one financial industry source with direct
knowledge of Xie’s style.

The securities regulatory body, the sovereign wealth fund,
the Finance Ministry and the social security fund declined
immediate comment on the planned personnel changes. Guo, Lou and
Xie could not be reached.

Reuters reported last week that central bank governor Zhou
Xiaochuan is set to keep his job for an unspecified period,
despite being aged 65, as the country’s leaders seek to maintain
the momentum of financial reform. He would be
made a vice chairman of parliament’s advisory body, giving him
“national-level leader” rank that would exempt him from
compulsory retirement, sources have said.

Like Zhou, Chen Yuan, 68, is likely to be appointed a vice
chairman of the advisory body, the sources said, adding that
Chen would stay on as chairman of China Development Bank
, the sources said. In its role as a policy bank,
state-owned CDB lends to China’s largest infrastructure projects
and offers financial aid for the country’s industrial giants to
internationalise.

The Commerce Ministry is seen as one of the Chinese agencies
most amenable to broader reforms, which could give Gao’s
appointment broader implications, said Tu, the professor.

That is significant given Beijing’s growing interest in
owning physical assets in the economies where China has a steady
income from trade which could be used to fund purchases. That
approach achieves twin goals of balancing capital flows and
reducing exposure to paper assets from the United States and
Europe, which analysts say China’s top policymakers have tired
of.

STRATEGY SHIFT

Beijing has watched for three years as Europe’s crisis has
choked growth and demand in China’s biggest export market and
stoked default risks on the near $800 billion of euro zone
government bonds China is estimated to own as part of its $3.3
trillion of foreign exchange reserves.

Meanwhile, record low yields on U.S. Treasuries and a
depreciating dollar have seen the value of China’s dollar
holdings fall by a third in the last 10 years, adding weight to
Beijing’s view that the time is ripe to change investment tack.

If China can engineer a rise in cross-border corporate
merger and acquisition activity, it could take some of the
political sting out of the rebalancing flows. But the reluctance
of foreign governments to accept the acquisition of stakes in
strategic assets by entities ultimately controlled by China’s
Communist Party, and a patchy track record in dealmaking, have
led to frustrations.

The long delays to approving the record $15.1 billion
takeover of Canadian oil and gas company Nexen by Chinese
state-owned oil major CNOOC Ltd – the deal finally
closed in February after seven months – offer a typical example.

Outbound China deals ran into trouble everywhere from
Iceland to Myanmar in 2011, including a $5.4 billion PetroChina
deal in Canada, a $7 billion CNOOC
transaction in Argentina and Bright Food Group’s
$2.5 billion bid to buy French yoghurt maker Yoplait. The United
States regularly objects to Chinese takeovers on the grounds of
national security.

($1 = 6.2181 Chinese yuan)

(Additional reporting by Victoria Bi, Lucy Hornby, Huang Yan
and Aileen Wang; Writing by Nick Edwards; Editing by Ian
Geoghegan)

Pan, a former journalist, is tipped to take over from
career bureaucrat Zhou Shengxian when Premier-in-waiting Li
Keqiang forms his new cabinet during the annual session of
parliament which begins on Tuesday, three independent sources
familiar with the matter said.

“A recommended list (of cabinet ministers) lists Pan Yue as
the environmental protection minister. But this is not final and
could change at the last minute,” a source with ties to the
leadership told Reuters.

With China desperate to show it is determined to tackle its
pollution problems, the appointment of the popular Pan would
help build confidence in the country’s environmental protection
bodies and their ability to rein in some of the country’s most
powerful industrial interests.

Public anger over air pollution that blanketed many northern
cities in January has spread to online appeals for Beijing to
clean up water supplies as well. Across the country, to the
government’s alarm, social unrest spurred by environmental
complaints has become increasingly common.

Pan has routinely criticised China’s excessive focus on
growth and the weakness of its environmental watchdogs, saying
the country’s obsession with economic expansion had created a
massive “environmental overdraft”.

But the 53-year-old has paid the price before for his
outspoken comments.

Also, the environment ministry still faces formidable odds
in the face of China’s complex bureaucracy and weak enforcement
of laws. It lacks the authority to take on big state-owned
enterprises, including oil firms, and local governments.

“If Pan Yue is appointed minister, it would give real
credibility to (incoming President) Xi (Jinping)’s message about
wanting people who get results and don’t just talk,” said
Elizabeth Economy, a senior fellow at the Council on Foreign
Relations who has studied China’s environmental problems.

Parliament spokeswoman Fu Ying said on Monday that the
largely rubber stamp legislature would tighten two environment
laws during its annual session by linking protection efforts
with local government performance evaluations and further
reining in emissions.

UNLEASHING “STORMS”

Pan’s possible promotion would also represent a significant
upturn in fortunes since his career stalled in 2008 amid
political opposition and personal difficulties.

In the middle of the last decade, when he served as the
deputy director of China’s State Environmental Protection
Administration (SEPA), Pan was feted by the domestic and foreign
media as a fearless campaigner against giant government-backed
polluters, but his stance created enemies.

“Many saw him as too liberal, but he has restrained himself
in recent years,” a second source with leadership ties said.

His profile reached a climax in 2005, when he confronted
dozens of powerful state-owned enterprises. The crux of the row
was SEPA’s power to enforce its rules, with the state giants
arguing they were directly subject to the State Council and
therefore not obliged to comply with SEPA rules involving
environmental impact assessments.

The media heralded Pan the victor after the Three Gorges
Project Corp, the powerful state-owned developer of the world’s
biggest hydropower project on the Yangtze River, was ordered by
the State Council to comply with SEPA following a week-long
stand-off.

In 2006, he also took on the China Petrochemical Corp
(Sinopec) and the China National Petroleum Corp
(CNPC), the parent of PetroChina, the country’s two
biggest oil firms, in a drive against water pollution.

And in 2007, Pan again turned his attention to China’s big
state-owned power firms, including Datang Power,
Huadian Power and Huaneng Power, all
accused of failing to comply with SEPA regulations.

Known in the Chinese media as “environmental protection
storms”, the campaigns pitted China’s relatively weak
environmental agency against some of the most powerful interest
groups in the country — including Huaneng, formerly run by the
son of Li Peng, China’s influential former premier.

In 2008, while still a vice-minister at the newly
established Ministry of Environmental Protection, Pan was
stripped of most of his public responsibilities, and restricted
to handing out awards, launching awareness campaigns and making
speeches.

Pan’s public criticism of powerful state interests might
have been the main reason his career stalled, but his divorce
from a daughter of prominent military official Liu Huaqing did
not help, the sources said.

Liu, who died in 2011, was navy commander from 1982 to 1988
and credited with its modernisation. He was also a member of the
Communist Party’s Politburo Standing Committee – the apex of
power in China – from 1992 to 1997.

But after years of lying low, Pan’s confrontational style
could now make him the right man for a very difficult job, and
help head off growing public anger about the state of the
country’s rivers and skylines.

“Certainly his appointment would give a real boost to the
prominence of the environment within the government
bureaucracy,” said Economy. “Overall, it would be a big win for
environmental activism.”

(Additional reporting by Ben Blanchard; Editing by Raju
Gopalakrishnan)

In other plans, the government is also likely to set up a
single regulator for food safety, although details are still
being finalised.

The changes will address long-standing inefficiencies. The
Ministry of Railways has a reputation for insularity and
corruption. Responsibility for food safety in China is currently
divided among over a dozen agencies, meaning there is little
effective oversight.

The changes are set to be approved at the annual full
session of the National People’s Congress, or parliament, which
begins on Tuesday. A cabinet reshuffle is expected as Xi Jinping
takes over formally as president and Li Keqiang as premier.

“Part of the Ministry of Railways will be merged with a
super Ministry of Transport,” one source with leadership ties
told Reuters, requesting anonymity to avoid repercussions for
speaking to foreign reporters.

A state-owned enterprise will absorb the Ministry of
Railways’ commercial arm, the sources added.

The Railways Ministry has faced numerous problems over the
past few years, including heavy debts from funding new
high-speed lines, waste and fraud. The government has pledged to
open the rail industry to private investment on an unprecedented
scale.

“Our deep hope that the (railway) reforms become the clarion
call for a new round of trade reform and a trigger for the huge
potential of reforming the monopoly state sector, to create the
maximum benefit for China’s future development,” wrote Hu Shuli,
editor in chief of Caixin, a respected financial weekly.

The Ministry of Railways will likely be split into a
“Railways Bureau” that will oversee operations and personnel for
the sprawling network, the 21st Century Business Herald
newspaper reported on Monday.

The lucrative freight business and passenger transport would
be incorporated and added to state-owned enterprises overseen by
the State-owned Assets Supervision and Administration
Commission, or SASAC.

SACKED

Railways Minister Liu Zhijun was sacked in February 2012 and
expelled from the ruling Communist Party last May for taking
bribes and using his position to help the chairman of an
investment company get “enormous illegal profits”.

Liu successfully resisted a merger with the Ministry of
Transport five years ago, but the Ministry of Railways was dealt
a big blow and its reputation damaged when he was sacked and by
a deadly 2011 crash on its flagship high-speed service killing
40 people.

“The Railways Ministry will be demoted (in status),” a
second source said.

While reformers push to break up the Ministry of Railways
fiefdom, food safety regulation has the opposite problem of too
many overlapping jurisdictions.

A new watchdog similar to the U.S. Food and Drug
Administration could be set up, streamlining a complex
regulatory system that has seen a series of scandals over food
contamination and fake medicines, the South China Morning Post
said on Monday.

Last-minute wrangling could keep pharmaceuticals out of the
watchdog’s purview, after an unsuccessful first attempt several
years ago, the Hong Kong-based newspaper said.

China’s State Food and Drug Administration (SFDA) was
founded in 2003 as a ministerial-level agency directly under the
State Council but was downgraded and affiliated the Ministry of
Health in 2008 after a number of corruption scandals involving
the sale of drug approvals.

The SFDA is currently responsible for policies and
programmes on the administration of drugs, health food, medical
devices and cosmetics, while the Health Ministry mainly handles
food safety and other agencies look after packaging and animal
health.

The General Administration of Quality Supervision,
Inspection and Quarantine (AQSIQ) also has responsibility for
inspecting product quality in China and for imports or exports.

Zheng Xiaoyu, former head of SFDA, was executed in July 2007
for taking bribes and dereliction of duty after a series of drug
safety scandals on his watch.

(Additional reporting by Mark Bendeich in Sydney; Editing by
Raju Gopalakrishnan)

Xi, who will take over the reins of state power from outgoing President Hu Jintao at this month’s annual full session of parliament, has made fighting pervasive graft a central theme since assuming the top job in the party and military in November.

The Communist Party marks the 100th anniversary of its founding in 2021, one year before the second of Xi’s two five-year term ends and he steps down as party chief.

“Only if the capabilities of all party members unceasingly continue to strengthen, can the goal of ‘two 100 years’ and ‘the dream’ of the great rejuvenation of the Chinese people be realized,” Xi said in a speech marking the 80th anniversary of the Central Party School, which trains rising officials.

“Two 100 years” refers to both the party and the People’s Republic of China lasting at least a century each.

The People’s Republic turns 100 in 2049. The Communists swept to power and founded the republic in 1949 after winning a civil war and forcing Chiang Kai-shek’s Kuomintang, or Nationalist, troops to flee to Taiwan, which Beijing still claims as its own.

The concept of “two 100 years” has been alluded to in state media over the past few weeks, but this is the first time Xi explicitly mentioned it in his speech on Friday, which was carried in whole by the People’s Daily, the party mouthpiece.

Xi has warned in the past that corruption threatens the party’s very survival and launched a campaign to prevent waste and graft. He also banned the 2.3 million-strong People’s Liberation Army from binge drinking and told it to be combat- ready.

The Chinese leader peppered his latest speech with references to aphorisms from virtuous officials and philosophers from ancient China, including Confucian philosopher Mencius (372 to 289 BC) and Zhuge Liang (181 to 234 AD), a statesman and strategist lauded to this day for his wisdom and devotion to his monarch.

“Leaders and officials must study China’s fine traditional culture … which contains extensive knowledge and profound scholarship,” Xi said.

“Spare no effort in the performance of one’s duty until the end of one’s days … I will do whatever it takes to serve my country even at the cost of my own life, regardless of fortune or misfortune to myself,” he added, quoting two classical texts.

But party members must also not forget the teachings of Karl Marx and late Chairman Mao Zedong, Xi said.

SURVIVAL

Stability and survival remain the Communist Party’s watchwords as the world’s second-largest economy grapples with an upsurge of protests and social tensions over growing inequality, environmental degradation and graft.

Ensuring the party makes it to its 100th anniversary and does not go down as just a footnote in China’s long history is one of Xi’s key challenges.

“Even the Nationalist Party is over 100 years,” one source with ties to China’s leadership told Reuters, referring to Taiwan’s ruling party and onetime rival to the Communists in running all of China which was founded in 1912.

“If the Communist Party cannot reach 100, it would only be a dot in China’s 5,000-year history,” the source said, requesting anonymity to avoid any repercussions.

“The Communist Party turning 100 will be Xi’s most important (set) event during his 10-year rule.”

(Editing by Sanjeev Miglani)

The Party aims to bring 400 million people to cities over the next decade as the new leadership of president-in-waiting Xi Jinping and premier-designate Li Keqiang seek to turn China into a wealthy world power with economic growth generated by an affluent consumer class.

The urban development would be funded by a major expansion of bond markets, sources with leadership ties, and a senior executive at one of China’s “Big Four” state banks, who was formerly at the central bank, told Reuters.

“The urbanization drive will push the domestic capital market liberalization agenda,” the senior bank executive said on condition of anonymity. “Urbanization is Li Keqiang’s big project. He has to get it right and he is willing to pursue innovation to make it a success.”

Set to be confirmed as premier at the end of the annual meeting of China’s rubber-stamp parliament, which opens next week, Li must find ways to pay for the urban development that he has made a policy priority.

Central and local governments, as well as bank loans, will fund the costs, the sources said. But, sweeping reforms to create a fully-functioning municipal bond market, boost corporate and high-yield bond issuance and actively steer foreign capital into the sector, are crucial to raising the sums of money China will need, they added.

Despite its ranking as the second-largest economy globally after three decades of stellar growth, China remains an aspiring middle-income country riven with inequality and dependent on state-backed investment.

“If we continue to walk down the path of government spending, it’ll be like wearing new shoes, but walking the old road,” a source with leadership ties said, requesting anonymity to avoid repercussions for speaking to foreign media without authorization.

BANK DEBT DEPENDENCY

China’s economy largely relies on state-directed bank lending to fund investment projects, but the massive 40 trillion yuan outlay envisaged to urbanize the rural outskirts of some 270 cities is far beyond the means of the current system.

Bank credit quality was badly strained by the economic stimulus program of 2008 that, at a headline 4 trillion yuan, was only a tenth the size of the Urbanization program.

By the end of 2010, local governments had racked 10.7 trillion yuan of mainly bank debt to fund their commitments to the stimulus.

Total debt outstanding in China’s fledgling bond market was 26.4 trillion yuan as of the end of January 2013, People’s Bank of China (PBOC) data shows – barely a sixth of the size of the U.S. bond market – and most of what is traded is issued by policy banks to support their lending.

The need for bond market reform has grown more urgent since December, when Li accelerated a commitment in China’s 12th five-year plan to spend 40 trillion yuan on Urbanization by 2030. That money will now be spent over the next decade.

“(Li) Keqiang changed the target date during the Central Economic Work Conference last December,” said a second source with leadership ties.

Currently, China lacks a properly functioning municipal bond market and is only just developing high-yield bonds, both of which would be needed to attract the investment capital sought.

And Beijing’s qualified foreign institutional investor (QFII) rules stop dedicated overseas bond funds participating in the market by insisting as much as half the money they plan to invest goes into equities.

BOOSTING CONSUMPTION

In the face of slowing exports, the government wants to raise domestic consumption’s share in the economy to close one of the world’s widest gaps between rich and poor and quell discontent among those Chinese who feel they missed out on blistering economic growth of the past three decades.

The economy picked up in the fourth quarter as a spurt of infrastructure spending orchestrated by Beijing broke seven straight quarters of a slowdown.

Consumption’s contribution to growth, however, fell in the fourth quarter for the third straight quarter.

About 13 percent of China’s population still live on less than $1.25 per day, the United Nations Development Programme says. Average urban disposable income is just 21,810 yuan ($3,500) a year.

Meanwhile, China has 2.7 million millionaires in dollar terms and 251 billionaires, according to the Hurun Report, known for its annual China Rich List.

Urbanization could cure China’s economic imbalances, a study by consultants at McKinsey showed last November, putting it on a path to domestic consumption-led growth within five years to replace three decades of investment and export-driven development that stoked global trade tensions.

The government hopes 60 percent of its population of almost 1.4 billion will be urban residents by 2020, from about half now, and will build homes, roads, hospitals and schools for them.

But Urbanization and market reform must go hand in hand, as simply adding to housing stock risks creating “dead cities”, according to Xia Bin, a former adviser to the central bank and now head of the financial research institute at the cabinet’s think-tank.

A senior financial diplomat in regular contact with Chinese officials concurred.

“The focus should not just be on construction. They should also focus on creating a market,” the diplomat said. “If they fail to create a market, they will end up with an urban poor much worse off than the rural poor.”

($1 = 6.2351 Chinese yuan)

(Additional Reporting by Victoria Bi in HONG KONG and Aileen Wang in BEIJING; Editing by Simon Cameron-Moore and Neil Fullick)