Will “Xiconomics” Work After the 20th Congress?

In Xi’s report to the 20th Party Congress in October 2022, the term “security” was cited 91 times. Here, Xi’s definition of security encompasses a wide range of concerns in addition to the traditional military and geostrategic connotations of the term. The outcome of the 20th Party Congress indicates that Xi has mitigated the issue of political security within the party; and economic and technological security have now become Xi’s top concerns. According to many Western analysts, the future of China’s economy is expected to worsen. This author, however, believes that China’s economy will recover and be ready for next phase of growth over the next three to five years.

Xi Jinping’s Economics (Xiconomics)

A good part of the so-called economic security facing China – including crisis in the property sector, weak and sluggish domestic consumption, high youth unemployment (as high as 20% of Chinese youths aged 16-24), discriminatory practices against the private sector, and a significant decline in local government revenues, among others – arise from the government’s economic and “Zero-COVID” policies over the last few years. Geopolitical tensions as a result of growing mutual mistrust between China and the West, especially the US, further contribute to China’s economic woes. In particular, the US has imposed restrictions on China’s access to key technologies.

Most Western analysts predict that China’s economy would continue to decline after the 20th Party Congress. However, they have overlooked the fact that economic growth has been the primary pillar of legitimacy for the Communist Party of China (CPC) in post-Deng Xiaoping China; and this remains the same with Xi. Therefore, Xi will do everything within his power and means to get two things right: to promote “domestic circulation” at home, and to stabilise “international circulation” abroad.

The Domestic Circulation

The term “domestic circulation” essentially entails enhancing domestic economic capacity.

Year 2022 marks the last year of China’s 3-year action plan to reform its State-Owned Enterprises (SOEs). The reform plan aims to improve SOEs’ resource allocation efficiency and core competitiveness through “restructuring and integration”. These include enhancing the resilience and competitiveness of SOEs’ supply chains, leveraging on their economies of scale to foster innovation, and encouraging the synergistic mergers between SOEs or with private enterprises along industrial value chains. Publicly listed SOEs are the primary targets of China’s SOE reform efforts; statistics show that the total assets of these listed companies account for 68% of the central SOEs’ total assets, and 86% of total profits.

When State-Owned Assets Supervisory and Administration Commission (SASAC) was established in 2003, there were 196 central SOEs under its supervision. By the 18th Party Congress in 2012, the number was reduced to 117; and now the number has further shrunk to 96. Growing economies of scale is the most notable impact of such “restructuring and integration”. More than half – 49 out of the 96 central SOEs, to be exact – are listed in the Fortune 500 in 2022.

Focusing on domestic circulation also entails an “all-out” approach to promoting China’s technological competitiveness. Xi Jinping reiterated in his 20th Party Congress report the importance of China’s technology self-sufficiency. Xi emphasised that it is a matter of national security, as the West, especially the US, seeks to curtail China’s development by obstructing its access to key technologies. In Xi’s own words, “improving a new system for mobilising the resources nationwide to achieve breakthroughs in core technologies in key fields and comprehensively strengthening efforts to conserve resources” is of paramount importance. Investment in high-tech businesses increased by an impressive 20.2% year-on-year in the first three quarters of 2022. Of course, even with the “whole-of-nation system,” it remains to be seen if China will be able to meet the objectives it has set for itself, such as striving to reach a 70% semi-conductor chip self-sufficiency rate by 2025 (from a mere 30% in 2019).

The third aspect of China’s domestic circulation focuses on addressing the issue of property and consumption. About 70% of China’s household wealth is being tied to property ownership. Due to falling real estate prices, house-owners are now stuck with properties that are worth less than what they paid for, thus making mortgage payments a major concern. The Chinese government has since introduced a series of policies to buttress the housing sector. While the days of the real estate boom are over, the pace at which prices fluctuate is still largely manageable; and a catastrophic collapse of the real estate sector is unlikely.

The International Circulation

One would be deeply mistaken to think China is only concerned with its domestic circulation. Indeed, international circulation is being seen as directly beneficial to boosting China’s domestic circulation.

The international circulation comprises two overarching objectives: firstly, to create a better business environment in China to retain existing high-quality foreign investment, and, at the same time, attracting more high-quality Western capital; secondly, to promote trade while furthering China’s Belt and Road Initiative.

In order to break the external “siege”, China is committed to putting more emphasis than ever on attracting global capital, technologies, talents, and other high-quality products and production factors. One strategy adopted is to encourage foreign investors to set-up R&D headquarters in China. Not long after the 20th Party Congress, China’s National Development and Reform Commission, along with six other departments, has announced 15 measures to boost foreign investments, making it more convenient for international stakeholders to do business in China. Apart from attracting technology-related foreign capital, the present energy crisis in European countries will undoubtedly cause energy-intensive businesses to relocate their operations elsewhere, and China will welcome them with open arms.

“Team Xi”

A common mistake many Western observers are prone to making is to view Xi’s allies and advisers on his team as mere “yes-men”, and therefore would conclude that China’s economy is doomed to fail. Although loyalty is a necessary criterion for Xi to pick his core team members, it would not be a fair assessment to see these people as mediocre or incompetent. Taking Li Qiang as an example: during his time in Shanghai, Li Qiang had maintained a close relationship with China’s tech entrepreneurs, including Jack Ma, founder of the Alibaba Group. It is also worth noting that Li Qiang was one of the few senior CPC officials who advocated the use of Western-developed mRNA vaccines during the COVID-19 outbreak, although Xi had decided against this on the ground of political consideration. Xi’s position on the use of German vaccines in China seems to have relaxed after German Chancellor Olaf Scholz’s visit to China in November 2022, suggesting that Xi could have come around to appreciate the merits of Li Qiang’s proposal. Li Qiang’s legacy in Shanghai also includes Tesla’s $2 billion investment to build a factory in the city, the company’s first outside the United States. Li Qiang oversaw the sealing of the Tesla deal, among many other foreign investment projects. Thanks to Li Qiang for pulling the strings, Tesla has been allowed to hold the sole ownership over its Shanghai Giga-factory.

“High Winds and Stormy Seas”

In the third quarter of 2022, China’s GDP grew 3.9 percent year-on-year, which was below Beijing’s target of 5%, but still managed to beat the expectations of Western analysts. Given the pressing need to enhance its economic and technological security, the focus of China’s economic development is likely to shift towards the direction of technological breakthroughs and self-sufficiency, while striving to maintain a decent growth rate. Xi’s third term will be a period of critical importance, as China experiments and validates the viability of its economic model for sustainable and high-quality growth. As Xi stated in his report to the 20th Party Congress, the nation should prepare to “undergo the major tests of high winds and waves, and even perilous, stormy seas.”

Zhang Junhua
Senior Associate at the European Institute for Asian Studies

March 2023