In the Chinese Communist Party’s five-year political cycle, the Third Plenum meeting is usually where long-term economic blueprints are unveiled. With the Chinese economy under greater strain than at any point in the last 40 years, many analysts had hoped this month’s Plenum would provide greater clarity on how these issues would be resolved. Instead, the meeting’s set of seemingly contradictory messages left many perplexed or in downright despair.

How does, for instance, the Party plan to both ‘let the market go’ (放得活) while ‘keeping it in check’ (管得住)? For veteran China watchers, the whole thing has a ring of déjà-vu. Chen Yun, Deng Xiaoping’s conservative, pro-planning counterpart in the 1980s and 1990s, thought the market economy should be like a bird in a cage — free to move about, but only within limits. 

In the West, increased Party-state control is seen as the opposite of enhancing market dynamics. One must take precedence, and we all know Xi usually leans in the direction of state control. 

But China lives in contradictions much more readily than its critics. The leadership always phrases its overriding goal as a ‘main contradiction.’ This does not mean siding with one or the other — it means combining the two to create a new path.

And as Beijing is engaged in an all-out great power competition with America, the need for a new path of economic development has never been more urgent. Xi believes China’s scarce resources must be channeled into industries that enable it to resist and ultimately transcend U.S. attempts to suppress its rise. The country must remain confident it will be successful. In some ways, its survival depends on it.

Grant me a market economy, but not yet

China’s dialectical traditions mean “contradictions” are inherent to the way Communist policymakers frame their initiatives. Defining a new “contradiction” is also a way of defining the overriding priority of a new administration. 

For Xi Jinping, the key contradiction is between “unbalanced and inadequate development and the people’s ever-growing needs for a better life.” (Translation: the structure of the economy needs an overhaul, to develop more equitably). Without this transformation, the country will be fundamentally weakened by looming systemic or national security risks. Getting the jump on technologies that China’s leadership has identified as key to the 21st century is the key.

To succeed in its grand national vision, Beijing needs to limit the population’s instincts and desires. In simplistic terms, you can’t divert capital into priority (but not yet profitable) technology industries if there’s a higher margin available on luxury vacation villas. You can’t work down the pile of bad debt that’s plaguing the country if everyone wants to send their money abroad to, at the very least, diversify their wealth. 

…changing the incentives that prevail under Xi will take more fundamental reforms than appear to be forthcoming, and more time than Beijing may have before it becomes too late to avoid irrevocable economic damage.

Much of this has manifested in limits on private business. The anti-monopoly campaign is a good example. Outside of China, its pledge to combat ‘market distorting forces’ is often seen instead as Xi’s most decisive turn away from the market. But for Beijing, its logic was clear. The unsupervised expansion of internet giants into consumer credit risked generating more unsustainable debt among some of the most vulnerable members of society. True, taking on this strong group with vested interests had political motivations as well. But importantly, the government could not risk a resultant credit crisis at a time when resources were desperately needed in industries essential to navigating geopolitical tension.

In other words, you cannot “let the market go” without “keeping it in check”.

‘De-bottlenecking’ is the name of the game

Within this framework, the key determinant of success for Beijing’s chosen development path is how to boost productivity growth, while limiting people’s aspirations for their own betterment. 

Gains from the Third Plenum are therefore in the first instance more likely to come from de-bottlenecking and the removal of other obstacles that stand in the way of doing business.

These include measures to unify China’s domestic market (by reducing internal barriers to commerce, like provincial monopolies) and ongoing efforts to remove obstacles to small and medium-sized enterprises (SMEs), which account for the bulk of employment, obtaining the bank financing they need to grow.

Beijing is also focusing on smart manufacturing and logistics to smooth the flow of goods and reduce costs domestically. These top-down policies are useful, but what will really help here is China’s scale. Shaving fractions of a percent off margins will pay off for those Chinese businesses that are able to compete nationally. 

Firms that can compete nationally will probably be internationally competitive too, helping to cement China’s dominant role in international commerce. But those champions will squeeze out many others that formerly thrived in China’s fragmented local markets. This ‘contradiction’ no doubt concerns Beijing’s leadership, which is gambling on the idea that debottlenecking will revitalize the economy enough to absorb that displaced workforce and any bad debts that pile up as uncompetitive firms fail. 

But this brings us back to the fundamental ‘contradiction’ in Xi’s reform policies — they are all about supply, and seldom about demand. His three terms have focused solely on delivering policies to a people whose “ever-growing needs for a better life” are treated as purely passive.

If his strategy fails to absorb the unemployed and resolve bad debts, previous attempts to control the private sector will have a chilling effect. Entrepreneurs now struggle to interpret which activities will eventually be seen as market-distorting, as one cannot simply respond to market demands when Beijing may suddenly deem those demands unacceptable. 

Xi might be striving for a private sector that looks similar to Germany’s Mittelstand: a large stable of private SMEs that are innovative, generate high-paying jobs, and produce technologically advanced manufactured goods. However, such a transformation will prove difficult when Xi’s mantra is frugality and redistribution.

Ultimately, why would business owners want to succeed when spending how one wants is frowned upon, and hard-earned gains could be taken away to serve the needs of the Party?

Some of this may be offset by nationalism — the desire to contribute to national rejuvenation has long been a powerful force in China, and will remain so. But changing the incentives that prevail under Xi will take more fundamental reforms than appear to be forthcoming, and more time than Beijing may have before it becomes too late to avoid irrevocable economic damage. 

Xi may acknowledge the proven energy and creative capacity of his population, but rarely does he trust it to deliver the results he wants. But it is that energy that must truly be “let go” if China’s economy is to recover its dynamic growth.

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