Xi's Vision Clashes with China's Economic Reality

The Communist Party's recent gathering failed to deliver significant economic reforms, as Xi's priorities took precedence despite the slowing economy and growing imbalances.

Jul 24, 2024

The Facts:

China's president, Xi Jinping, has a vision of transforming China into a global manufacturing powerhouse that leads the world in technological innovation. However, this pursuit is increasingly weighing on China's economy, which is facing a slowdown and growing imbalances.

The recent Third Plenum of the Chinese Communist Party, a significant meeting held every five years to discuss economic reforms, was attended by over 360 members of the CCP's Central Committee, including key political, military, and state-owned enterprise leaders. This gathering concentrated on "Further Deepening Reform Comprehensively to Advance Chinese Modernization." Third Plenums, which are the third meetings in the party's five-year cycle, traditionally focus on economic policy and are closely monitored by party cadres and global businesses.

The communiqué from the meeting stressed continuity rather than a significant course correction, with Xi's existing economic priorities reflected. Perennial issues like property tax and local government debt remain unresolved, and the CCP's stance on the private sector appears more tepid than in 2013. The actual impact of the CCP's decisions often becomes apparent over time through actions rather than just words.

China's growth is slowing, propped up by exports and heavy investment in factories, while much of the rest of the economy languishes. Consumers are reining in spending, the housing market is depressed, local governments are drowning in debt, and foreign investors are pulling out their cash, all while China's population is rapidly aging.

China's economy is struggling to transition away from a growth model reliant on land sales and property development, and faces increasing barriers from the West. The property market crisis in China is in its third year, with declining home sales, falling prices, and unfinished pre-sold homes. This has had a significant impact on local governments, which have seen a sharp drop in income from land sales, a key source of funding. Many provinces and cities are now in dire financial straits, unable to pay back the estimated $7 trillion to $11 trillion in off-balance-sheet debts they accumulated in recent years.

The communiqué did offer some reassurance for investors, promising to "strive to expand domestic demand" and defuse risks in the property market, local government debt, and smaller banks. However, it also reflected the party's ambivalence, calling for "letting go" to invigorate market forces while "managing well" to maintain market order.

Despite these challenges, Xi appears unwavering in his pursuit of economic security measures. He aims to reduce China's reliance on Western technology and semiconductors while positioning the country as a leader in industries like clean energy, electric vehicles, and advanced computing. To this end, Xi has been investing heavily in China's factories. However, the results have been mixed at best, leading to falling prices, weak corporate profits, and growing international unease over China's surge in exports.

The View:

Xi Jinping's relentless pursuit of his vision for China's economic transformation is clearly taking a toll on the country's overall economic health. Despite slowing growth, rising imbalances, and other pressing challenges, the Chinese leader appears unwilling to make necessary course corrections.

The recent Third Plenum of the Communist Party, touted as a potential opportunity for significant economic reforms, ultimately fell short of expectations. Instead of bold, market-friendly overhauls, the meeting reaffirmed Xi's priorities, doubling down on national security, high-tech industries, and the party's tightening grip on the economy. The communiqué emphasized continuity rather than significant changes, suggesting Xi Jinping's existing economic priorities remain intact. This outcome disappointed those who anticipated substantive economic reforms, reflecting a trend towards more government intervention in the economy rather than the promised "reform and opening up" and "Chinese-style modernization."

Historically, Third Plenums have been watched for signs of change, with varying results that often reflected a more collective leadership in earlier eras. However, the current agenda closely follows Xi Jinping's will. Today’s reality leans towards increased government intervention in the economy despite reformist rhetoric.

The CCP's policymaking ultimately depends as much, or more, on personalities and the pressure of events as on the showpiece meetings of the party or state. Whatever the future holds for China's politics and economy, Xi Jinping's central role in guiding both appears ensured. The Chinese leader seems more focused on enhancing China's geopolitical and technological dominance than on addressing the fundamental issues undermining the country's economic stability and long-term prospects.

TLDR:

China's economy is facing a slowdown and growing imbalances, including declining consumer spending, a depressed housing market, and local government debt issues.
The recent Third Plenum of the Chinese Communist Party reaffirmed President Xi Jinping's existing economic priorities, with little emphasis on substantial market-friendly reforms.
Xi Jinping remains focused on transforming China into a global manufacturing and technological powerhouse, even as the country's economic stability and long-term prospects are under threat.
The CCP's policy-making is increasingly dominated by Xi Jinping's personal agenda, reflecting a trend towards increased government intervention in the economy.
China's pursuit of economic security measures, such as reducing reliance on Western technology and semiconductors, has had mixed results, leading to falling prices, weak corporate profits, and growing international unease.
The communiqué from the Third Plenum promised to address issues like property tax, local government debt, and risks in the property market, but the actual impact of these decisions remains to be seen.