For Xi, Growing China’s Economy Isn’t Enough
After several months of delays, China will hold the third plenary session of the 20th Central Committee next month, a meeting that is typically associated with major economic reforms or policy announcements. The postponement of the Third Plenum in 2023 led to widespread speculation that the Chinese Communist Party under President Xi Jinping was divided or undecided about economic policy, particularly in the wake of the Chinese economy’s underwhelming performance after Xi’s “Zero Covid” policy was lifted in late 2022.
The meeting comes at a time when bifurcated narratives about the Chinese economy permeate the media outside China. One narrative focuses on the structural problems and the policy fumbles that have riddled Xi’s administration for several years, highlighting low economic growth rates, high unemployment, faltering consumption, demographic headwinds and a loss of confidence in the future. The other narrative focuses on China’s major successes in manufacturing, particularly in new energy sectors, such as solar and electric vehicles, through industrial policy and state-led development. China appears to be catching up and threatening the dominance of capitalist economies in these important sectors as well as artificial intelligence, or AI, as well as semiconductors and aviation.
Overcapacity and export gluts are critical parts of both narratives and if viewed comprehensively connect the bad with the good. China’s inability or unwillingness to boost domestic consumption necessarily focuses economic policy on export-led manufacturing to fuel growth. So while they emphasize different aspects of China’s political economy, the two media narratives are mutually dependent on each other.
This leads to a chicken and egg problem. What is causing what? Is domestic underconsumption driving Chinese firms to look for export markets and compete globally via their success in new industries? Or does Xi’s administration suppress consumption in order to prolong China’s emphasis on production and manufacturing? Is Xi’s famous interest in the real economy—making “things”—delaying China’s shift to a new economic stage that would prioritize domestic consumption and develop the high-end service part of the economy, including financial services, health care and education?
The Third Plenum should clarify Xi’s economic direction in his critical third term as both party secretary-general and president, both unprecedented in the post-1989 era. It may also answer more conclusively this question of what is driving China’s decision to double down on high-end manufacturing, even though doing so aggravates relations with the country’s major trading partners through the export of excess capacity.
One key to unlocking China’s economic direction is to look at the ideas embraced by Xi that are associated with the only academic to ever rise to the heights of China’s government, Wang Huning. Wang is now a member of the Politburo Standing Committee, the seven-man ruling body of the CCP, and is responsible for adding ideological heft to the policy directions of the Xi administration. His ascent to power in the 1990s coincided with a rising interest among China’s ruling elite in neo-authoritarianism, a form of authoritarian governance modeled after Singapore.
Political scientists like Wang understand that one of the central theories of political development is the association between economic modernization and democratic governance. Though causation is much contested, there is a clear correlation between becoming a high-income country and democratization. Most rich countries are democratic; moreover, it is much easier to stay democratic when one is rich. The exceptions are important, especially to China: They include successful city-states like Singapore and resource-rich countries like the oil states of the Middle East. As a young academic in the aftermath of the 1989 student movement, Wang Huning was one of many academics interested in the Singapore model of neo-authoritarianism, combining the rule of law, markets and one-party authoritarianism.
The upcoming Third Plenum could clarify what is driving China’s decision to double down on high-end manufacturing, even though doing so aggravates relations with the country’s major trading partners.
Two terms that are central to Xi’s ideological arsenal, and which shed light on how he views this challenge, are “new productive forces” and “Chinese-style modernization.” They are directly connected as well: New productive forces are the engine for the realization of Chinese-style modernization, and understanding how Xi’s administration sees these forces can tell us something about what China’s economic policies may look like following the plenum.
Chinese-style modernization, or CSM, the ultimate goal of the Xi administration, aims to make China rich, but not democratic. So, managing social forces as China grows wealthy and strong is key. In an excellent new analysis about new productive forces as the engine to realizing CSM, Arthur Kroeber argues that Xi’s use of the phrase harkens back to his Marxist roots, while adding technological innovation as a key driving force, alongside labor and capital, in realizing greatness. Xi’s past moves, and his future agenda that will be laid out during the Third Plenum, are mainly about control over all three. However, as tools to be wielded to achieve China’s greatness, labor and capital—unlike technology—are both social forces. They need to be controlled and managed lest the people’s own desires and preferences foment into mobilization against the CCP.
Since 2014, Xi’s administration has cracked down inexorably on labor. From 2015 until 2021, he also turned his focus on capital, through stock market changes, Common Prosperity and his signature anti-corruption campaign. As Kroeber notes, Xi’s administration has also focused on harnessing capital more effectively to invest in the sectors that the state has prioritized through venture capital-like “government guidance funds.” The CCP’s suppression of China’s burgeoning labor movement and its relentless anti-corruption campaign against business elites and officials ensure that further economic development will not lead to the political mobilization of labor or capital against the CCP.
China has been ruled by the CCP since 1949, but its authoritarian character has changed dramatically under Xi. During the administrations of Deng Xiaoping in the 1980s, Jiang Zemin in the 1990s and Hu Jintao in the 2000s, China was in authoritarian survival mode. The CCP focused on growth as the sole metric for economic development. Authoritarian survival required balancing between different social forces. Under Jiang, the state sector was ruthlessly restructured, and millions of urban workers lost their jobs in the process. Capital benefited at labor’s expense. The succeeding Hu administration focused on reducing inequality and redistribution by tightening labor and employment laws while developing new programs of social insurance. Labor benefited while business griped about the slow pace of liberalizing reforms.
Xi is more ambitious than to aspire to simple survival. His authoritarian revival has included ideological campaigns to burnish the CCP’s role across society, combined with simultaneous attacks on capital and labor. Growth as a metric of success is no longer enough. Xi’s focus on new productive forces and “high-quality” development directs state investment and private capital in the sectors that will promote China’s technological leadership and autonomy from the economies of other states.
These changes are fundamental revisions of what the CCP promised its people at the onset of the reform period: rising economic growth and household prosperity. Xi wants to make the nation strong and competitive globally at the leading edge of the technological frontier, but that requires investment choices that do not necessarily provide jobs for China’s legions of low-skilled workers nor promise huge wealth accumulation among China’s entrepreneurs, if they are outside of those vaunted industries.
Xi’s economic vision for China is therefore a huge gamble, not only because it prioritizes the state in dictating growth, but also because it does not provide employment opportunities for labor or investment opportunities for capital in the same way that China’s previous growth model did. The current economic malaise and loss of confidence, especially among China’s business elite, might be a sign of displeasure with Xi’s vision of China’s future.
Will that displeasure ever morph into outright opposition? In the context of significant political repression and widespread social surveillance, it is difficult to imagine mass mobilization against Xi’s rule. But for the first time in the reform period, the CCP under Xi is attempting an economic development model that isn’t focused on broad growth, but rather on success in a few technologically important sectors. He is likely to be able to suppress opposition, but the enduring question is whether he can mobilize support, even as unemployment remains high and households feel poorer.
Mary Gallagher is the incoming dean of the Keough School of Global Affairs at the University of Notre Dame.