At the start of his third term, Xi clarified his vision of how the CCP should reach its targets for the country. Over his first two terms, economic policy shifted towards political, ideological and security objectives. But 2022 marked a sea change for Xi’s policy priorities and their attendant trade-offs. Xi’s ideological views permeated economic policy – to the detriment of economic growth. To reverse the downturn after the prolonged lockdown of its “zero-Covid” policy, China has downplayed ideology in 2023, and “pragmatism” has returned to economic policymaking.
This is not a course reversal, but rather a matter of tone and timing. Despite softer language and a less ideological tone, the flurry of rules and regulations imposed in 2020-2022 to strengthen the party’s grip over the economy have not been abolished. They are simply taking a back seat to boosting investor and consumer confidence amid a disappointing post-Covid recovery. China’s leadership has gone into overdrive to woo foreign investors who have become wary of China, not only due to growth prospects but also to political dynamics – both in China and at home.
China is now an economic giant, accounting for around 20 percent of global gross domestic product (GDP) and 30 percent of global manufacturing. Xi Jinping no longer feels bound to the foundations that guided his predecessors. In the past, leaders tolerated considerable risk in their domestic reforms in order to maximize economic development opportunities. These included the massive displacement of capital and labor with Zhu Rongji’s state-owned enterprise (SOE) reforms, or Deng Xiaoping’s agenda of opening up and pushing integration with the global economy.
This “gamble” has paid off, and Xi is setting his sights on taking China to a higher level of development and global influence. In pursuit of the second centennial goal (100th anniversary of the PRC / 中华人民共和国成立100周年), Xi has shifted the party baseline (党的基本路线) from focusing on economic development to coordinating development and security (统筹发展和安全). This marks a new direction that emphasizes party control over the free hand of the market and puts a greater priority on minimizing risks and achieving political and geopolitical goals than on economic development.
China’s economic policymaking in the last decade was characterized by an urgency to build an economy that could withstand external shocks. Increasingly, its policy priorities are geared toward a geopolitically oriented economy that is obsessed with US-China competition and deprioritizes the emphasis on social development. A key metric in measuring success is whether or not China can eclipse the US economy. This depends on many factors, including GDP growth in China and the US, inflation and exchange rates. This offers a range of possible outcomes (see Exhibit 1). Following years of strong growth, China’s next phase of “catching up” will be accompanied by slower growth. But success is also measured in relative terms: China sees the US and the West as in decline. Regardless of its relative size to the US economy, China is back on the world stage and will remain an economic heavyweight.