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President Xi Jinping is seeking growth and national self-sufficiency by strengthening state-owned enterprises while attracting selective private foreign investment.
In short
- China’s core strengths can keep its economy growing at 4 percent a year
- From the zero covid policy to the real estate crisis, mistakes have done a lot of damage
- Self-sufficiency is threatened by US-led bans on the transfer of key technologies
Chinese President Xi Jinping mentioned the word “security” 91 times in his report to the 20th Party Congress. His concept is not only related to military and geopolitics but also, most importantly, to economic and technological security.
The end of the congress in October signals that Mr. Xi has settled his own political security within the party for the time being. Faction fighting is no longer a direct threat to his power. His uncompromising policy is evident from the incident involving former President Hu Jintao, who was abruptly escorted out of the 20th Party Congress by security officials. As for the composition of the Politburo Standing Committee, President Xi has hand-picked all the members and thus they will be subordinated.
Many Western observers predict that China’s economy – the world’s second largest with a gross domestic product estimated at $15 trillion this year – will fare worse in the coming years. However, China’s economy is likely to continue growing, albeit at a much slower pace than the spectacular 9 percent average annual expansion from 1980-2020.
The essence of Xykonomy
Many of the recent economic security problems facing the Chinese Communist Party are due to President Xi’s unwise moves, including his zero-Covid policy. The strict Covid lockdown has not only sparked the ongoing mass protests, but exposed the broader goals of at least some Chinese to remove Mr Xi from power.
Mr. Xi’s economic policies have caused a real estate crisis, weak spending, high youth unemployment (20 percent for those aged 16-24) and exploitation of private businesses. A huge drop in local government revenue is contributing to the strain.
An important feature of President Xi’s policy (hereafter Xykonomics) is ambition. For example, he particularly emphasizes the need to make state-owned enterprises bigger and stronger, as symbols of socialist economic security, as well as an important cornerstone of China’s response to global economic shocks.
Economic policy depends only on President Xi.
Some of China’s economic problems are also the result of Mr. Xi’s contentious interactions with the West, particularly the United States. The events resulting from his policies have undermined trust and deepened tensions between China and the West. This is exemplified by US restrictions on China’s access to high-value semiconductors. The West is also suffering from the global energy crisis and inflation, all of which lead to lower imports, which hurts the Chinese economy.
Economic policy depends only on President Xi. Charting the direction of China’s economy over the next five to 10 years requires an understanding of Xyconomics.
Some Western observers argue that China’s economy will decline further. But they forget that since President Deng Xiaoping, economics has been the main basis of the CCP’s legitimacy, and this is no exception for Mr. Xi Jinping. For this reason, Mr. Xi will do everything in his power to achieve two goals: improve “domestic traffic” and ensure “international traffic”.
Domestic circulation
By domestic traffic, Mr. Xi means strengthening the domestic economy. The Chinese leader has long sought to strengthen state-owned enterprises (SOEs) at the expense of private enterprises. State champions in key sectors are selected and bred. State-owned enterprises should not only improve their own resilience and competitiveness, but also play a dominant role in the economy. This concentration of state power is well underway. Statistics show that 68 percent of the total assets of listed companies belong to central state-owned enterprises, and 86 percent of profits are attributed to central state-owned enterprises.
Mr. Xi stressed the importance of China achieving self-reliance in science and technology.
President Xi’s “mixed reform” is really intended to help SOEs return to monopoly. In 2003, 196 central state-owned enterprises were registered by the Administration for the Supervision and Administration of State Property. In 2012, the number was reduced to 117 and now 96 central state enterprises remain, but their size is much larger than ever. Among them, 49 were included in the world Top 500 this year.
Another characteristic of domestic traffic is the strengthening of China’s technological competitiveness. Mr. Xi stressed the importance of China achieving self-reliance in science and technology, a goal he reiterated at the 20th Party Congress. Since many technological issues are also national security issues, the CCP will focus more than ever on making strides in overcoming technological obstacles imposed by the West, especially the US. Issues such as securing the supply of microchips became the highest priority. No wonder the Ministry of Information Technology gathered the chip companies for an emergency meeting right after the 20th Party Congress.
By the same token, some lures are used to attract foreign capital, especially in the high-tech sector, to increase China’s competitiveness. In the first three quarters of this year, investments in high-tech industries grew by an impressive 20.2 percent on an annual basis. Of course, whether China will be able to achieve its goals, such as 70 percent self-sufficiency in chips by 2025, compared to 30 percent in 2019, is still a big unknown.
The third aspect of domestic turnover is real estate and consumption. China’s real estate sector, which once contributed a quarter of China’s output for more than a decade, is in a downward spiral. About 70 percent of Chinese household wealth is tied to real estate. Falling house prices have left buyers struggling to pay mortgages on properties that are now worth less than what they owe. This forced President Xi to ease shopping restrictions in some cities. The real estate boom days are over, but the CCP can at least avoid collapse.
Facts and figures
Top 10 Chinese Companies in Fortune Global 500 for 2022
International traffic
President Xi is not only concerned with domestic traffic. Improving international traffic will also directly help domestic traffic.
This concept has two aspects. One is to create a better environment in China to retain valuable Western companies while attracting new foreign capital, especially in high-tech projects with high potential for value-added production. Over the next five years, China will focus on attracting new investment to break the external siege aimed at curbing China’s ambitions. One approach is to encourage foreign investors to set up research and development (R&D) centers in China.
Immediately after the 20th Party Congress, the National Development and Reform Commission and six other departments announced the “15 Articles to Stabilize Foreign Investment,” promising to improve the environment. In addition to attracting technology-rich investment, the current energy crisis in Europe may encourage energy-intensive companies such as steel, fertilizer and battery producers to move their operations out of Europe. China is ready to absorb them.
Unlike previous openings to the world, Mr Xi’s new shift will not hurt his push to make his favored state-owned enterprises more competitive. By creating a de facto monopoly of state-owned enterprises in the domestic market, foreign companies will not be able to gain a large market share, especially with greater restrictions on private enterprises.
Another aspect of international traffic is trade, including the Belt and Road Initiative and the massive infrastructure investments China is making around the world. Beijing believes that China is not suffering from the energy crisis as much as Europe, while rising commodity prices in Western and developing countries will inevitably lead to good opportunities for Chinese exports, given Beijing’s deliberate efforts to reduce costs (wages, energy). Today, in the most economically developed province of Guangdong, wages for part-time workers have regressed to 20 years ago, with hourly wages of just nine renminbi ($1.26) or less. In other words, workers are victims of China’s export industry.
A zero covid future
The existing zero covid policy is sure to change as it runs counter to dual circulation efforts. Zeng Guang, former chief epidemiology scientist at the Chinese Centers for Disease Control and Prevention, publicly signaled the review. Wang Huning, a close aide of Xi Jinping, is believed to be leading the move to reopen. The problem facing Mr. Wang presents the previous zero-Covid policy as brilliant, while also portraying the current turnaround as a result of Mr. Xi’s wise leadership.
Xi’s Xyconomy Team
President Xi’s team, or his Politburo Standing Committee, is full of political loyalists tasked with improving the economy. The performance of key figures other than Mr. Xi deserves attention. Take Li Jiang, who is set to become premier next March. While running Shanghai, Mr Li maintained close ties to tech giants, including Jack Ma, the founder of Alibaba. During the Covid outbreak, he was also one of the few senior officials to support the use of a Western-developed mRNA vaccine in China instead of a domestically produced one despite President Xi’s initial opposition. Mr. Xi’s relaxation of the use of German vaccines, announced during a recent visit by Chancellor Olaf Scholz, implies acceptance of Mr. Lee’s proposal. Also, while in Shanghai, Mr. Li presided over several key foreign investment projects such as Tesla spending $2 billion to build a factory in Shanghai that is wholly owned by the carmaker, a rare concession to the norm of joint ownership with the state . Mr. Lee combines business acumen with the ability to align with President Xi on key policies.
Scenarios
China’s gross domestic product grew 3.9 percent year-on-year in the third quarter of this year. If this figure is reliable, it suggests that China’s economy is still doing better than many expected.
At best, China can achieve technological progress and self-sufficiency, so that it can grow at about 4 percent per year. Large foreign companies and Chinese state-owned enterprises will be the main driving forces in maintaining a strong manufacturing sector in the country.
At worst, economic problems will eventually pile up, leading to the near collapse of China’s economy and society. The Taiwan War could then become an optimal distraction for Mr. Xi.
President Xi and the CCP’s economic policies will be tested in his third term – or, as he said in his report to the 20th Party Congress – “tested by strong winds and waves, and even shock waves.”
Whatever the future holds, it seems clear that social enterprises will play a stronger role. August data spoke of happiness: then the value of social enterprises increased by 5.6 percent, joint-stock companies by 4.1 percent, foreign companies by 4 percent and Chinese private companies by only 1.1 percent.
This shows that while economically and technologically powerful foreign enterprises, as well as socially owned monopolistic enterprises, will enjoy every feast in China, domestic private companies will have a harder time. It will not be easy for less technologically advanced foreign companies either. Some Chinese businessmen took the hint. About 10,000 wealthy Chinese are looking to leave China. If they succeed in emigrating, they will take at least $48 billion with them.
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