With China’s economy continuing to face substantial headwinds in 2023, despite signs of stabilization over the last quarter, hopes have emerged that there will be a return to pragmatism in policy making. Over the summer Beijing introduced numerous measures to give more support to the private sector and households. This was complemented by a charm offensive towards foreign companies, including an easing of capital controls and promises to relax cross-border data flow restrictions.
Those measures might suggest that Xi Jinping is easing up on the private sector in response to growing public frustration. Such thinking is folly.
Rather than being indicators of a sea-change in policy trajectory, these steps are merely minor corrections to shore up the baseline of an economy increasingly focused on geopolitical, rather than developmental, goals. At the top of Beijing’s priority list is securitizing the economy from what it perceives as ‘containment’ by the U.S. and its allies. That means technological self-reliance and supply chain resilience. In that light, development and growth are lower tier priorities – luxuries where the nation may have to accept shortcomings in future, as the party state revives the rhetoric of “struggle”.
All this doesn’t mean the role of the private sector and market forces is coming to an imminent end. Since Xi Jinping came to power, he has emphasized their importance in his messaging, especially to foreign investors. Some of the promises made in a key document from the 2013 ‘Third Plenum’ meeting have materialized: just ask private sector champions like BYD, Geely, and Huawei, or the small and medium sized companies fostered under the so-called ‘little giants’ program.
But counterexamples are abundant too. Many innovative and growth-driving private firms like Alibaba and Tencent have taken a thorough beating from Beijing in recent years.
Understanding Xi’s new ecosystem requires a different framework. It is increasingly clear that he is agnostic about whether a company is ‘private’ or not – what matters to him is not ownership, but alignment with the leadership’s strategic goals. To that end, the party state’s control over the direction of economic entities has greatly expanded, both in terms of sticks with which to beat wayward companies into line, as well as carrots to reward the dutiful.
…the leadership cannot be ignorant of the impact its policies are having on sentiment — a reminder that even the all-powerful Party cannot force its will on everyone all at once.
Most notably the private sector is now performing just as the party wants it to by investing in the “real economy”. While overall private investment had contracted by 0.5 percent by the end of October, investment in manufacturing surged by 9.1 percent over the same period. Since 2021, investment in manufacturing has outpaced overall investment by 10.2 percentage points — a reversal from the period between 2013 and the onset of the pandemic at the end of 2019, when manufacturing investment grew on average 1.4 percentage points below total investment.
Meanwhile even the high growth-driving parts of the economy, that do little to contribute to Xi’s geopolitically focused plans, are being cowed into line. The real-estate sector, which accounts for around one third of GDP, not only adds nothing to Beijing’s strategic goals, it also generates sizable risk, through surging debt and market speculation. Similarly, the consumer internet sector, which generated some of China’s most successful firms, was deemed to be adding too little to the “useful” kind of innovation that Beijing demands – what’s required now is less social media and gaming, more industrial software and semiconductors.
The leadership may have miscalculated the negative side effects of the medicine it is administering, in terms of the stress the adjustments are causing. The turmoil is exposing well known risks in the leveraged financial system, and also holding back consumption while becoming a cause of record youth unemployment. China’s economy is not on the cusp of a crisis. However, the leadership cannot be ignorant of the impact its policies are having on sentiment — a reminder that even the all-powerful Party cannot force its will on everyone all at once.
The recent policy adjustments aimed at reassuring the private sector and households are part of an effort to soften the blow. This explains the rather restrained and targeted stimulus measures which are focused on stabilization.
One could argue that the crackdowns on key growth drivers were a bit clumsy, but it goes to show that the Party state accepts lower economic growth in order to get companies in line. Although the current slowdown in China’s economy is in large part self-induced and a reflection of new priorities for the economy, the weak headline figures might overshadow the fact that the adjustments are making some progress, at least in Beijing’s eyes.
In the coming weeks, the CCP is set to have yet another “Third Plenum” meeting that is likely to spell out signals for the direction of China’s political economy. Rather than focusing on the most recent measures in favor of the private sector and market forces, observers should consider the last decade of Xi’s economic governance. At best, the implementation of Xi’s vision for the economy might decelerate a bit, but the direction of travel is not about to change.
Max J. Zenglein is the Chief Economist of Mercator Institute for China Studies (MERICS), a think tank in Berlin.
Jacob Gunter is a Lead Analyst for China’s economy at Mercator Institute for China Studies (MERICS), a think tank in Berlin.
Both are authors of the recently published MERICS Report “The party knows best: Aligning economic actors with China’s strategic goals.”
