7. Beijing struggles to balance economy and ideology

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Over the past decade Xi Jinping was able to progressively expand his own vision for China’s economic system by reconfiguring it with the ideological principles outlined in the previous chapters. In 2023 the economy is – again – under much stronger guidance of the party – and economic policy making is beset by growing distrust of liberal market economies. The implementation of Xi’s economic priorities are in full swing in pursuit of achieving the 2049 vision of the great rejuvenation. But clearly it is not all smooth sailing and Xi’s third term looks to be off to a rocky start.

It is becoming inherently difficult to reconcile economic interests with political ones and becoming obvious that pursuing geopolitical priorities comes with a price on the economy. The expectations of a swift return to pre-pandemic consumption patterns within Chinese households have been thwarted while private companies are struggling. It seems as if the leadership underestimated the profound impact of the confluence of factors from zero Covid, the crackdown on the dynamic tech sector and real estate - as well as rising geopolitical risks.

As the economy is absorbing the policy-medicine the party-state prescribed it is causing side effects for the different actors:

• Society: After decades of improvement in livelihood the outlook is changing for some. There is a risk of parts of China’s youth being part of the first generation since the start of the reform process that sees its development stall. Record levels of youth unemployment and poor wage prospects have resulted in growing disillusion. While growing nationalism might counter this to some extent, accepting hardship for the greater good of nation will be a difficult sell for many.
• Bureaucracy: Compared to the start of Xi’s first term, party and government officials are operating in a very different ecosystem. The anti-corruption campaigns, the return of ideology, an increasingly top-down and campaign-style approach to policy making have diminished the incentives for policy-making experimentation at the local level. Officials that must do their job while wearing their political hats will likely continue to decide that doing what is ideologically right is more important than what might actually work in their ecosystem, or worse yet, that they will choose inaction out of fear that the consequences of any steps they take will yield the wrong results.
• Chinese companies: Many private companies are at odds with the direction of economic policies – while without doubt some companies also flourish as they fully embrace the priorities. There is a real risk of many highly innovative and productive economic actors choosing to hold their heads down by not being willing to take on entrepreneurial risk if the prospects of returns are limited if they are not aligned with the strategic priorities of the party. Similarly, the many export-oriented SMEs that have thrived over the past decades serving liberal market economies might also be at odds with politics increasingly getting in the way of business.
• Foreign companies: Lower growth prospects and changing market environment are forcing foreign companies to make strategic adjustments on how they position themselves in the Chinese market. Many need to strike a balance between de-risking and localization in a way that does not undermine their competitive position. While China continues to court foreign companies, especially in technological areas it needs, compa- nies are increasingly at risk at being caught up in opaque national security regulations or punished for actions of their home government.

Recent economic policy adjustments do not mark a return to more liberal economic policies

In response to the struggling economy, the party released a range of policies aimed at alleviating concerns of private and foreign companies as well as households over the summer of 2023. They seem to be geared towards alleviating concerns over the direction of the economic system. Some the most noticeable measures include:

• 14th July 2023, on the private sector: “Opinions of the Central Committee of the Communist Party and the State Council on Promoting the Development and Growth of the Private Economy” (中共中央 国务院关于促进民营经济发展壮大的意见),¹⁰⁹
• 31st July 2023, on consumption: the “General Office of the State Council Forwards the Notice of the National Development and Reform Commission on Measures to Restore and Expand Consumption” (国务院办公厅转发国家发展改革委关于恢复和扩大消费措施的通知),¹¹⁰
• 13th August 2023, on foreign investment: “Opinions of the State Council on Further Optimizing the Foreign Investment Environment and Enhancing the Attraction of Foreign Investment” (国务院关于进一步优化外商投资环境 加大吸引外商投资力度的意见),¹¹¹
• 4th September 2023, on the private sector: “Private Economic Development Bureau” (民营经济发展局) by the National Reform and Development Commission (NDRC) is newly established.¹¹²

The policies embrace fair competition, market-oriented restructuring, stronger rule of law, efforts to boost consumption as well as more opportunities for foreign companies. Such measures are a recognition of how implementing Xi’s the party’s economic principles has affected sentiment of the private sector and households. The efforts to shore up economic growth revive more reformist language and contrast the efforts aimed at strengthening party oversight. However, the oft-billed "pragmatism" of such measures and language are not yet likely to be indicative of a sea change in Xi’s approach to economic governance. Rather, these steps are matters of tone and timing.

As the third plenum approaches more such language can be expected for as long as China’s economy continues to struggle. In an effort to improve business sentiment the importance of markets and openness will be stressed. The aim is to soften the impact that economic actors are feeling as they settle into the new normal of Xi’s geopolitically focused political economy. But akin to what was said in the 2013 third plenum, the words need to be seen in the larger context of Xi’s visions for the country and the role the party has in it.

The policy direction set during the third plenum will be a test and an opportunity to evaluate the attempt how the leadership tries to reconcile trade-offs between strategic priorities and sufficient economic growth. At the moment the adjustments are more symbolic than substantive. A meaningful shift of policy direction would likely demand far more economic and social pressure. Nevertheless, the recent measures to reinforce the private sector are reminders that the leadership is not immune to market sentiment and that the party struggles to sell its policy objectives to all its subjects.

Success of course is not certain. There is the risk that the ideological streamlining of the economy fails, forcing for more substantial policy adjustments in the future. But for now, the overall direction is rigorously following the path Xi has set out over the past ten years. Even in times of lower growth it seems more likely that Xi will force his vision on economic actors and limit any adjustments to minor concessions.

The events currently unfolding might be as impactful as China’s integration into the world economy in the early 2000s. But the economic and geopolitical context has dramatically shifted from integration to competition – if not conflict – with liberal market economies. China’s future reforms and opening must be seen in the context of Xi Jinping’s strategy for its next stage of development. Instead of again engaging in wishful thinking about China’s development path as was done in 2013, Europe and other liberal market economies will need to accept the systemic differences and work out a pathway for mutual existence – that includes accepting the systemic challenge and preparing for competition.

Dealing with China and the structural break of today’s globalization should be seen as a wake-up call for Europe. It presents an opportunity and will require the courage to break though decades old thinking. Policymakers and corporate boardrooms continue to take a defensive posture as they face the dilemma of responding to a changing China. European policy is focused on measures to defend the common market from distortions from and dependencies on China, while C-suite discussions are about how to defend their footprint in the China market.

All actors would do well to adopt more offensive postures that cooly calculate what will be necessary to compete with China in third markets. For corporates, that means assertive strategies to secure market share in third markets and to wrestle with increasingly advanced competitors. For policymakers, that means strengthening ties with third countries and building the framework necessary to support European exports and investors in markets beyond Europe’s jurisdiction. In other words: pursue in other markets the kind of strategies Europe applied to China after it began reform and opening up.

Endnotes

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2 | Refer to Annex 1 for a deeper breakdown of the different generations of leadership and the core tenets of their political economies

3 | People’s Daily (2021). “从站起来、富起来到强起来的伟大飞跃” (The Great Leap From Standing Up, and Becoming Prosperous, to Growing Strong). July, 24. http://theory.people.com.cn/n1/2021/0624/ c40531-32138960.html. Accessed: August 30, 2023.

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54 | Peking University School of Computer Science (2023). “北京大学计算机学院三位教授荣获四枚’火花奖’” (Three professors from Peking University's School of Computer Science have won four Spark Awards) March, 17. https://cs.pku.edu.cn/info/1304/3862.htm. Accessed: August 30, 2023.

55 | Kirton, David. Reuters (2023). “Huawei launches in-house software system after being cut off from US services.” April, 20. https://www.reuters.com/technology/huawei-launches-in-house-software-system- after-being-cut-off-us-services-2023-04-20/. Accessed: August 30, 2023. Liu, Qianer. Financial Times (2023). “‘We have survived’: China’s Huawei goes local in response to US sanctions.” May, 3. https://www.ft.com/content/32f40217-dc3e-4e02-9433-0c20ae3d7d79. Accessed: August 30, 2023; Reuters (2023). “Huawei makes breakthroughs in design tools for 14nm chips – media.” March, 24. https://www.reuters.com/technology/huawei-makes-breakthrough-design-tools- 14nm-chips-media-2023-03-24/. Accessed: August 30, 2023.

57 | Chen, Eliot. The Wire China (2022). “Who is Hubble Technology?” January, 30. https://www. thewirechina.com/2022/01/30/who-is-hubble-technology/. Accessed: August 30, 2023; Chem Chang. The New York Times (2023). March, 31. https://www.nytimes.com/2023/03/31/business/huawei- annual-earnings-2022.html. Accessed August 30, 2023.

58 | World Bank (2022). “Lifting 800 Million People Out of Poverty – New Report Looks at Lessons from China’s Experience.” April, 1. https://www.worldbank.org/en/news/press-release/2022/04/01/lifting- 800-million-people-out-of-poverty-new-report-looks-at-lessons-from-china-s-experience. Accessed: August 30, 2023.

59 | World Bank Blogs (2022). “New World Bank country classifications by income level: 2022-2023.” July, 1. https://blogs.worldbank.org/opendata/new-world-bank-country-classifications-income-
level-2022-2023. Accessed: August 30, 2023.

60 | White, Edward. Financial Times (2022). “Xi Jinping’s last chance to revive the Chinese economy.” October, 5. https://www.ft.com/content/92cbe94d-05a0-4ece-bca9-68cb82244b17. Accessed: August 30, 2023.

61 | Zenglein, Max J. (2018). Institutional Framework and Dysfunctionality of the Transitional Chinese Wage Bargaining Regime (Labor and Globalization). Germany: Rainer Hampp.

62 |  https://merics.org/en/short-analysis/time-different-structural-economic-reform-challenges-xis-3rd-term

63 | Wu, Guoguang. Asia Society Policy Institute (2022). “China’s Common Prosperity Program: Causes, Challenges, and Implications.” December 2022. https://asiasociety.org/sites/default/files/2022-03/ ASPI_ChinaCommonProsp_report_fin.pdf. Accessed: August 30, 2023.

64 | Hurun Research Institute (2022). “Hurun China Philanthropy List 2022.” December, 16. https://www. hurun.net/en-US/Info/Detail?num=WIWVJLUHGIU1. Accessed: August 30, 2023.

65 | Mary Gallagher. China Leadership Monitor (2023). “China’s Struggle for Common Prosperity.” March, 1. https://www.prcleader.org/post/china-s-struggle-for-common-prosperity. Accessed: August 30, 2023.

66 | Zenglein, Max J. (2018). Institutional Framework and Dysfunctionality of the Transitional Chinese Wage Bargaining Regime (Labor and Globalization). Germany: Rainer Hampp.

67 | Nulimaimaiti, Mia. South China Morning Post (2023). “China jobs: how Beijing’s vocational-training push is undermined by deeply ingrained education stigmas.” February, 7. https://www.scmp.com/ economy/china-economy/article/3209272/china-jobs-how-beijings-vocational-training-push- undermined-deeply-ingrained-education-stigmas. Accessed: August 30, 2023.

68 | China Change (2023). “China Has a Youth Unemployment Problem; Guangdong Province Spearheads a Plan to Send 300,000 Youth to the Countryside by the End of 2025.” April, 7. https://chinachange. org/2023/04/07/china-has-a-youth-unemployment-problem-guangdong-province-spearheads-a-plan-  to-send-300000-youth-to-the-countryside-by-the-end-of-2025/. Accessed: August 30, 2023.

69 | Creaders (2023). “清华教授：10年前后，中国是两个不同的国家” (Tsinghua professor: 10 years ago, China was two different countries). April, 30. https://news.creaders.net/china/2023/04/30/2603228.html. Accessed: August 30, 2023.

70 | Howell, Sabrina; Lee, Henry & Heal, Adam (2015). Leapfrogging or Stalling Out? Electric Vehicles in China. Cambridge, MA: Mossavar-Rahmani Center for Business and Government, Harvard Kennedy School.

71 | Nikkei (2020). “Toyota to provide China's GAC with hybrid system.” October, 15. https://asia.nikkei.com/ Business/Automobiles/Toyota-to-provide-China-s-GAC-with-hybrid-system. Accessed: August 30, 2023.

72 | China Daily (2022). “GAC Toyota upgrades NEV production capacity.” December, 21. https://www. chinadaily.com.cn/a/202212/21/WS63a2c007a31057c47eba5820.html. Accessed: August 30, 2023.

73 | Nagayasu, Masahiro. Nidec Corporation (2019). “Nidec to Form a Joint Venture with a Subsidiary of China-Based Guangzhou Automobile Group Company for Automotive Traction Motors.” August, 1. https://www.nidec.com/en/ir/news/2019/news0801-03/. Accessed: August 30, 2023.

74 | In 2000, the US still had stronger trade relations with 88 percent of the world. By 2021, China has long surpassed the US with stronger trade relations with 71 percent of the world. 88 percent = 147 countries; compared to 20 countries for which China was the larger trading partner in 2000 71 percent
= 95 countries; compared to 39 countries for which US was the bigger trading partner.

75 | Nyabiage, Jevans. South China Morning Post (2022). “China on course for Africa trade boost as it offers duty-free access to 9 more countries.” November, 22. https://www.scmp.com/news/china/diplomacy/ article/3199961/china-course-africa-trade-boost-it-offers-duty-free-access-nine-more-countries.  Accessed: August 30, 2023; Jennings, Ralph. South China Morning Post (2022). “China slowly undercutting US influence in Latin America with 5 ‘new factor’ trade deals.” August, 28. https://www. scmp.com/economy/global-economy/article/3190316/china-slowly-undercutting-us-influence-latin- america-5-new. Accessed: August 30, 2023.

76 | Sohu (2023). “ 传统产业不能当成“低端产业”简单退出“ (Traditional industries cannot be treated as "low- end industries" and simply withdrawn). May, 11. https://www.sohu.com/a/674627887_257321.
Accessed: August 30, 2023.

77 | Bloomberg (2023). “China’s Foreign Investment Gauge Declines to 25-Year Low.” August, 7. https:// www.bloomberg.com/news/articles/2023-08-07/china-foreign-investment-gauge-at-25-year-low-amid- high-tensions#xj4y7vzkg. Accessed: August 30, 2023.

78 | State Council (2023). “国务院关于进一步优化外商投资环境 - 加大吸引外商投资力度的意见” (Opinions of the State Council on Further Optimising the Foreign Investment Environment - Opinions on Increasing Efforts to Attract Foreign Investment). August, 13. https://www.gov.cn/zhengce/zhengceku/202308/ content_6898049.htm. Accessed: August 30, 2023.

79 | Rhodium Group & MERICS (2023). “EV battery investments cushion drop to decade low: Chinese FDI in Europe 2022 Update.” May, 9. https://merics.org/en/report/ev-battery-investments-cushion-drop- decade-low-chinese-fdi-europe-2022-update. Accessed: August 30, 2023.

80 | European Commission (2023). “China: EU trade relations with China. Facts, figures and latest developments.” https://policy.trade.ec.europa.eu/eu-trade-relationships-country-and-region/countries- and-regions/china_en. Accessed: August 30, 2023.

81 | MERICS (2022). “The bumpy road ahead in China for Germany's carmakers.” October, 27. https:// merics.org/de/studie/bumpy-road-ahead-china-germanys-carmakers. Accessed: August 30, 2023.

82 | MERICS (2019). “China's caution about loosening cross-border capital flows.” June, 19. https://merics. org/en/report/chinas-caution-about-loosening-cross-border-capital-flows. Accessed: August 30, 2023.

83 | Global Times (2022). “Yuan to see increased use in bilateral trade between China and Russia as dollar, euro share declines, ‘pushing internationalization drive.’” December, 2. https://www.globaltimes.cn/ page/202212/1280969.shtml. Accessed: August 30, 2023.

84 | MERICS (2023). “China’s global debt holdings are increasingly a liability for Beijing.” July, 4. https:// www.merics.org/en/tracker/chinas-global-debt-holdings-are-increasingly-liability-beijing. Accessed: August 30, 2023.

85 | Sina (2022). “ 王传福：谢谢深圳“ (Wang Chuanfu: Thank you Shenzhen). September, 2022. https:// finance.sina.com.cn/nextauto/hydt/2022-12-09/doc-imxwarir1542482.shtml. Accessed: August 30, 2023.

86 | Shenzhen Science and Technology Innovation Commission (2011). “深圳市人民政府关于印发深圳新材料产业振兴发展规划（2011—2015年）的通” (Notice of the Shenzhen Municipal People's Government on Printing and Distributing the Shenzhen New Material Industry Revitalization and Development Plan (2011-2015)). August, 3. http://stic.sz.gov.cn/xxgk/kjgh/content/post_2908046.html. Accessed: August 30, 2023.

87 | National Energy Administration (2012). ““深圳模式”给力纯电动汽车发展” ("Shenzhen model" to force the development of pure electric vehicles). July, 3. http://stic.sz.gov.cn/xxgk/kjgh/content/ post_2908046.html. Accessed: August 30, 2023.

88 | Broken link: https://news.yiche.com/info/33881822.html

89 | S&P Global Market Intelligence (2019). “China Continues Support For New-Energy Vehicles Despite Subsidy Phaseout.” November, 11. https://www.spglobal.com/marketintelligence/en/news-insights/ research/china-continues-support-for-new-energy-vehicles-despite-subsidy-phaseout. Accessed: August 30, 2023.

90 | Chen, Zhijie. Nanfang Daily Media Group (2008). “比亚迪、奇瑞获银行贷款与政府采购支持” (BYD and Chery Receive Bank Loans and Government Procurement Support). December, 15. https://auto.sohu. com/20081215/n261207163.shtml. Accessed: August 30, 2023.

91 | Reuters (2009). "BYD gets $2.2 bln in credit from Bank of China.” December, 3. https://www.reuters. com/article/byd-china-idUSPEK20977020091203. Accessed: August 30, 2023.

92 | Ministry of Industry and Information Technology (2021). “关于2016－2020年度新能源汽车推广应用补助资金清算审核初审情况的公示” (Announcement on the preliminary review of the liquidation and review of subsidy funds for the promotion and application of new energy vehicles in 2016-2020). June, 9. https://www.miit.gov.cn/zwgk/wjgs/art/2021/art_99ae13aa81d04a358e0443700fe100ce.html.
Accessed: August 30, 2023.

93 | Li, Jiaxing. KrASIA (2021). “NEV companies received USD 5 billion in subsidies from the Chinese government between 2016 and 2020.” September, 8, https://kr-asia.com/nev-companies-received- usd-5-billion-in-subsidies-from-the-chinese-government-between-2016-and-2020. Accessed: August 30, 2023.

94 | Gasgoo (2020). “BYD, Ansteel forge strategic partnership for R&D of lightweight, monorail tech, steel supply.” August 12. https://autonews.gasgoo.com/m/70017434.html. Accessed: August 30, 2023.

95 | Central Committee of the Communist Party of China & State Council (2023). “中共中央 国务院关于促进民营经济发展壮大的意见.” (Opinions of the Central Committee of the Communist Party of China and the State Council on Promoting the Development and Strengthening of the Private Economy). July, 14. https://www.gov.cn/zhengce/202307/content_6893055.htm. Accessed: August 30, 2023.

96 | State Council (2023). “恢复和扩大消费措施的通知.” (Measures to Restore and Expand Consumption). July, 31. https://www.gov.cn/zhengce/content/202307/content_6895599.htm. Accessed: August 30,
2023.

97 | State Council (2023). “国务院关于进一步优化外商投资环境 - 加大吸引外商投资力度的意见” (Opinions of the State Council on Further Optimising the Foreign Investment Environment - Opinions on Increasing Efforts to Attract Foreign Investment). August, 13. https://www.gov.cn/zhengce/zhengceku/202308/ content_6898049.htm. Accessed: August 30, 2023.

98 | https://www.gov.cn/zhengce/202309/content_6901921.htm

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