In search of a new formula: The politics of China's economy - SOAS China Institute

//In search of a new formula: The politics of China’s economy

In search of a new formula: The politics of China's economy

Phot credit: GovernmentZA / CC BY-ND 2.0

By Jonathan Fenby | 03 July 2024

For almost half a century, China’s economy has served its political masters well. Despite the challenge from protestors which was suppressed in 1989, high growth and the benefits which it has brought to the population has been a cornerstone of the Communist Party’s grip on power since Deng Xiaoping launched economic reform in the 1970s, and re-launched the process with his Southern Tour of 1992. Deng’s offer to the Chinese people of increased wealth in return for acceptance of autocracy proved a winning formula once the army and its masters had shown in June 1989 what would happen to anybody bold enough to challenge the regime.


As China approaches a key Communist Party economic meeting in mid-July, that equation now faces a challenge as growth slows and the flaws inherent in the hectic expansion of recent decades come to the surface in ever-increasing volume. This poses a major question for Xi Jinping and his colleagues in the leadership. Like somebody racing down a mountainside on a bicycle, the arrival on the plains below has to be handled carefully if the political machine which is at the core of Xi’s concerns is to maintain its balance and be preserved in a way that keeps it in the saddle.


It was only a matter of time until the combination of weaknesses built up in the race for growth came home to roost. As long ago as 2013 the then prime minister, Wen Jiabao, warned that the economic model was “unstable, unbalanced unco-ordinated and ultimately unsustainable”. But there was little let-up before the bubble burst at the start of the present decade under the combined impact of Covid-19 and the fault-lines accumulated over the previous decades. The connected effect of uncontrolled debt, the property slump, the fragile state of local government finance, low consumption and the diminishing effect of economic stimulus packages – not to mention the shadow of demographic decline – made a formidable combination at a time when, in the frequently repeated words of Xi Jinping, the world is undergoing changes not seen for a century and the external environment for China is becoming “increasingly severe and complex”.


Inevitably, that raises the question of whether, despite the insistence by the leadership that it is exercising a CCP version of the Mandate of Heaven burnished by technology, “Peak China” has come and gone, with deep implications for the country, the regime and the world in the years ahead. The following question, equally inescapable, is what the leadership in Beijing is going to do about it. So far, statements from the top have consisted largely of exhortations to promote “high-quality development” and to pursue new technologies that will give the People’s Republic the edge in a challenging international environment.


But it is far from clear how that path will substitute for the Deng equation which buttressed the regime for so long. Fear of upsetting the bulwarks of Party control may stand in the way of real reform. In the latest collection of Xi’s pronouncements and writings on economic policy in the Party’s Qiushi magazine, the key immediate questions are left unaddressed in favour of broad statements. The Party’s long-delayed Third Plenum on economic matters now set for July may bring some more concrete answers but is likely to find refuge in generalisations and re-assertions of the need to strengthen the political system. Measures to deal with the property crisis have been a matter of too little too late despite nearly 400 million square metres of unsold residential real estate, and there has been little sign of meaningful moves to boost consumption – for instance through improved welfare systems or reform of the hukou registration system. Meanwhile, hidden debts of local government are estimated by the Fitch ratings agency to be close to approaching the equivalent of $11 trillion, and some have had to cut back on services.


It may be that lower growth is not entirely unwelcome to the leadership. It fits ideologically with the mind set one detects in Xi Jinping and the Politburo he has fashioned below him. As they have shown by their moves to rein in the turbo-capitalists of the Hu Jintao era, the go-go, buccaneering style of the entrepreneurs who once headed the mainland’s billionaires list does not fit with the dominance of the Party State as imposed under Xi Thought. The leader’s repeated stress on the “struggle” ethos and the hostile environment for the People’s Republic points to a more puritanical approach than in the days when materialism, rather than Marxism, was the main motor for the People’s Republic.


In place of the earlier welcoming of relations with the rest of the world, Xi has set China on a path of “self-reliance” and suspicion of foreigners which requires national solidarity in place of personal enrichment. But the weaning of the population away from the Deng formula, which is all most people in China have ever known, would be a tricky course at the best of times.


To do this as the country grapples with the fall-out from the decades of expansion is a test out of which Xi may not be able to find his way. The economic challenge is not going to go away, despite the uptick in some monthly export figures and official boosting at the 2024 first quarter growth figure put by the authorities at 4.5%. US policy is clearly set on containing China, with the EU following, albeit not at full volume. Other Asian countries are hedging their China debts. The PRC can proclaim successes and scientific advances; still, serious underlying dependencies persist, from oil to advanced semi-conductors. Strategically, China may observe Western perplexity in world affairs with satisfaction, but the PRC’s foreign policy has been arousing plenty of doubts internationally, as well, while the Biden administration has been weaving a web of global alliances that run counter to Beijing’s global plans.


The delay in setting a date for the Third Party Plenum on economic policy, now finally fixed for mid-July, is indicative of the scale of the debate about how to proceed, and how far to prioritise real reform to the system over a continuation of old methods. In the past twelve years, Xi Jinping has imposed a political model of reinforced and expanded Communist Party power. Now, he has to evolve a new economic model that meets the challenges China has inherited from its growth. That will be the true test of his leadership.

Jonathan Fenby is a Research Associate at the SOAS China Institute, and author of eight books on China, including the Penguin History of Modern China.

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.