Xi Jinping has botched the political business cycle. 

An effective leader — in China or elsewhere — will typically manipulate economic policy to create good short-term conditions and optimism in the run-up to an election or critical meeting. That was the case back in 2017, as Xi was able to push through some tough measures in 2016 before enjoying a smooth recovery in the run-up to the 19th Party Congress. 

Today, the situation is the reverse. As China approaches the 20th Party Congress on October 16, the Chinese economy is in its worst shape in recent memory. Some problems have been caused by exogenous, random shocks, but most of them can be directly or indirectly attributed to Xi himself. 

Thus, while Xi’s lock on power still seems unshakable, he will likely seek to placate that unknown — but large and growing — section of the Chinese population that is uncomfortable with his economic performance. We should anticipate that he will engineer a modest strategic retreat, designed to assure his later ability to advance and strengthen his grasp on power.

To be sure, the biggest and most immediate threat to the Chinese economy is the zero-COVID policy, which has the potential to create mass lockdowns and plunge the economy into recession at any moment. But the strict policy is far from the only sign of economic distress. 

…the mood is glum because people realize the economy is just as likely to get worse as it is to recover.

Another unmistakable sign is that consumer confidence has dropped to unprecedented lows after plunging in April. Employment prospects have soured rapidly, with youth unemployment increasing to an unprecedented 19.9 percent in July. House prices have meanwhile stopped rising and are falling in about half of China’s cities (although not in Beijing, Shanghai or Shenzhen). Large numbers of borrowers have gone on mortgage strikes, refusing to repay bank loans taken out to purchase apartments that have gone undelivered. 

Partly as a consequence of these woes, money is leaving China which, despite having a supposedly closed capital account, is losing well over a net $100 billion per quarter, according to Chinese balance of payments data. Those outflows are equivalent to around 3 percent of total GDP, not a small sum by any means.

Finally, there is risk. A new large-scale COVID lockdown could tip the economy into a major recession. The housing crisis could spill over from bankrupt real estate firms into a more generalized financial crisis. Cash-strapped local governments could generate local crises as they try to squeeze resources from their local economies to substitute for evaporating housing revenues. Extraordinary weather events hitting power generation and water supply in the Yangtze could intensify: by some measures, this is the driest rainy season since modern record-keeping began in 1951.

In short, the mood is glum because people realize the economy is just as likely to get worse as it is to recover.

Is all this Xi Jinping’s fault? It is easy to criticize the zero-COVID policy but hard to devise ways to give it up. Thus far, it has minimized deaths in China, providing an enormous contrast with the U.S.’s chaotic handling of the epidemic. Capital outflows can be partly explained by the extraordinary strength of the U.S. dollar, which provides rising interest rates and returns, and also appears to be the only haven in a world beset by economic uncertainty. You can’t really blame Xi for droughts or for the severe earthquake that struck Sichuan Province on September 5, killing nearly 100 people, although these catastrophes bear eerie resemblance to the natural disasters in history that were viewed as signs of the end of a dynasty.

Yet to a large extent, the overall economic program that is causing so much trouble today is indeed Xi’s responsibility. 

Especially since the summer of 2021, Xi has introduced a broad spectrum of new goals that are vague and sometimes contradictory. While the drive for technological supremacy is still preeminent, Xi is now also pushing for “common prosperity,” for a higher birth rate, for a more disciplined housing sector, and for national data security, among a host of other objectives. 

Nobody is completely sure they can say what the direction of Chinese economic policy is right now. People are too busy putting out fires to set a clear vision.

Worse, in pursuit of these goals, Xi has not hesitated to adopt clumsy and inappropriate instruments. For example, to advance common prosperity, Xi has commanded big businesses to contribute money to his favorite causes such as poverty alleviation, instead of pushing much-needed tax reforms. In short, Xi has bashed capitalists instead of rolling out effective policies. No wonder households, especially wealthy households, are worried and money is flowing out of China.

Already, for about a year, policymakers have had to modestly roll back the policies Xi introduced in 2021. Premier Li Keqiang has struck a very different policy note, and Xi’s key economic adviser, Liu He, has stepped up to say that internet and data regulatory policy should be clear and transparent and have “green lights as well as red lights.” Macroeconomic policy has become less tight, and money has been made available to shore up the finances of some real estate firms. 

But it is striking that these policy adjustments are widely regarded as inadequate and insufficiently credible. While Xi has obviously approved these interventions, he himself has not taken a prominent role in changing course, instead stepping back and letting his subordinates take the lead. Nobody is completely sure they can say what the direction of Chinese economic policy is right now. People are too busy putting out fires to set a clear vision.

This pattern is likely to continue at the Congress, where there will be a large-scale turnover of economic personnel. The single most important economic adviser, 70-year-old Liu He, will almost certainly step down. A highly intelligent, market-oriented economist with ample international exposure and understanding, Liu He’s most important qualification has been his access to Xi himself. In fact, Liu has been over-extended for years since Xi has used him as a jack-of-all-economic-trades: from czar overseeing the financial system, to chief negotiator with Donald Trump, to architect of state enterprise reforms, to overall designer of science and technology reforms. To be sure, nothing will prevent Liu from informally advising Xi in the future, but he is hardly likely to be the positive and buffering influence he has been for the last decade.

Liu He’s retirement will be part of a broader generational change of enormous significance. An extraordinary group of economic technocrats was formed during the early years of the reform era, and that group has wielded substantial influence over policy from the 1990s through the present. Two leading members of this group, Zhou Xiaochuan, head of the People’s Bank of China from 2002 until 2018 and Lou Jiwei, the minister of finance from 2013 to 2018, have already been forced to step down by age limits.

Now, an even larger group is facing the end of their career. Current People’s Bank of China head Yi Gang, Minister of Finance Liu Kun, and the country’s top financial regulator, Guo Shuqing, all fit into this category and all are likely to step down. There is also a large group of minister-level officials of the same generation who followed a more traditional “within-the-system” career path, who are all likely to step down as well. 

Advisers close to Xi Jinping like Liu He will not lose 100 percent of their influence overnight, but the overall reality is that the economics professionals who will be stepping down will be replaced by others with much less diverse experience, with much less international renown, and with much less collective voice in the making of economic policy. 

…the lights are going out all over Beijing, and combined with Xi Jinping’s increasingly personalized and abrupt decision-making, it does not bode well for the future of China’s economic policies.

Of course, there are plenty of smart people in China ready to take over, but this reduction in independent voices cannot be a good thing: the lights are going out all over Beijing, and combined with Xi Jinping’s increasingly personalized and abrupt decision-making, it does not bode well for the future of China’s economic policies.

In this situation, Xi will most likely continue his behavior of the last year, adjusting policy without making big commitments either way. He will likely take a few steps at the Congress to provide a certain amount of “balance” in the leadership configuration and perhaps provide some continuity to reassure people in the face of widespread economic leadership turnover. But these steps, designed to placate opponents and reduce worry, should not be mistaken for a fundamental relaxation of Xi’s grasp on the levers of power or a major change in policy or the orientation of key personnel. 

What will Xi’s policy look like going forward? We already see clear hints. It certainly entails further intensification of the great technological and strategic struggle with the United States. The U.S. has in fact stepped up the degree of technological competition with the recent expansion of export controls, and Xi is under pressure to respond. Xi has chaired a recent meeting calling for further promotion of the “New National Team” (新举国体制), which involves assigning coordinated responsibilities among state and private firms to master key technologies. 

Inevitably, the response to the American technological challenge also requires “strengthening the centralized leadership of the Party.” This type of national effort might appeal to a fairly broad swathe of Chinese opinion. Xi’s strategy, then, is likely to involve saying to the population: “It’s not the economy, stupid. It’s about national greatness and strategic independence. And only one person, Xi Jinping, has the foresight and experience to lead you through this struggle.”

This article is an abridged version of a chapter in the report The Party Remakes China: What to Watch For After the 20th Party Congress, published last month by the 21st Century China Center at UC San Diego’s School of Global Policy and Strategy.

---

Click here to read another piece by Barry Naughton on the party politics driving Xi Jinping.

---