AT AN ECONOMIC CROSSROADS
At an economic crossroads
Despite expectations of a huge financial stimulus to boost China’s ailing economy, Yvonne Gill reflects on the surprisingly tame outcome of the CCP’s July Third Plenum session
In the midst of geopolitical and socio-economic turmoil across different regions of the world, the Central Committee of the 20th Party Congress of the Chinese Communist Party (CCP) held its much-awaited Third Plenary session from 15 to 18 July. Belying most expectations, the Third Plenum proved to be a meek affair –an exercise in reiterating policy priorities announcedby the CCP General Secretary Xi Jinpingover the last three years.
The plenum was originally expected to take place last November, but the session was postponed until mid-July for reasons that are unexplained. Traditionally, the third plenums have focussed on reviewing and rejigging economic policies. For instance, the Third Plenum of the 11thParty Congress held in December 1978 ushered in the Reform and Opening Era, ideologically spearheaded by Deng Xiaoping. In September 1992, the Third Plenum of the 14th Party Congress institutionalised the concept of socialist market economy.The Third Plenum of the 18th Party Congress, held in November 2013,unleashed a new wave of market-oriented reforms and economic liberalisation.
Even as the meeting was overshadowed by events in the US – the assassination attempt on former President Doland Trump, current President Joe Biden dropping out of the presidential race –as well asby heightened tensions in the Middle East and Ukraine and strengthening North Korea-Russia relations, not to mention the international ramifications of the Xi-Putin bonding, calls to decouple from the Chinese economy have only increased, with Ursula von der Leyen’s re-election as European Commission President and Germany,falling in line with the EU, agreeing to impose duties on China-made electric vehicles.
The plenum was expected to come out with a massive dose of financial stimulus to boost domestic demand, take measure to rescue the ailing property sector and introduce social security reforms to ease the plight of the growing number of unemployed. China’s slowdown, according to experts, is driven by insufficient demand, high savings, debt deflation and falling property prices,combined with lack of new investments. Hence, there isa need to raise household consumption, which in turn could bring in investors, who are reluctant to bet their money in an uncertain financial environment.
Instead, the CCP plenum document reiterated Xi’s much-touted thesis: New Quality Productive Forces. In Marxian terminology, labour and capital are referred to as ‘productive forces’. Xi believes that technology, too, has become a productive force and thus technological innovation is ‘the core element of developing new productive forces’. Based on this premise, the plenum communiqué emphasised channelling resources away from unproductive sectors such as real estate to the industries of the future, as well as promoting innovation and self-sufficiency in high-tech industries.
‘New quality productive forces’cannot be described as ordinary technological progress or marginal improvement; instead they involve disruptive technological innovation that promotes the development of ‘new manufacturing’, as explained by former Chongqing mayor Huang Qifan, an influential economic commentator.
China’s economic situation is grim. Nearly 40 banks have gone under or been merged with larger banks in the week before June 24, according to reports. Overall, China’s sluggish economy, combined with bankruptcies of large real estatebehemoths and a weakening stock market, has fuelled fears of a major financial crisis reminiscent of 2008, according to a Taiwanese newspaper, Liberty Times. The smaller banks are facing a ‘savings and loans’ crisis, with ‘the situation being most complex at smaller agricultural banks’.
The banks have been in trouble following the collapse real estate companies like Evergrande, Country Garden, Sino Ocean Group and SOHO China over last three years. Evergrande alone owes debts amounting to several hundred billions dollars to nearly 180 Chinese banks. The economic slowdown that ensued in the country has led to a sharp spurt in unemployment.
The CCP plenum document reiterated Xi’s much-touted thesis: New Quality Productive Forces
The government stopped releasing data on urban youth unemployment when the figures touched 21.3 per cent in June last year. The release of data was resumed after excluding students this year and the figures for December 2023 stood at 14.9. The general urban unemployment rate is 5.1 per cent, though experts believe the numbers to be much higher.
That President Xi Jinping himself warned the meeting about possible ‘black swan’ and ‘grey rhino’eventsshows the leadership is not oblivious to the risks that could hobble the economy. ‘Black swan’refers tounforeseen calamities with catastrophic implications, while ‘grey rhino’ events imply predictable yet frequently dismissed threats. The CCP leader is well aware of the fragile economic landscape that his government must navigate.
The plenum laid down 60 specific tasks. Most elaborate was task no. 14, which that calls for ‘deepening reform of the science and technology system’. The plan is to give a fresh impetus to the economy by leveraging emerging technologies to lead the world into a new round of techno-industrial revolution. Almost 70 per cent of local government industrial investment funds have been earmarked for S&T manufacturing. Tasks 5 and 6 relate to ‘building a high-level socialist market economic system’, including ‘consolidating and developing the public sector of the economy; and encouraging, supporting, and guiding the development of the non-public sector of the economy’. The plenum document makes it clear that the public sector is of primary importance while assigning a secondary position to the private sector. It directs the state to promote ‘the concentration of state-owned capital in important industries and key areas that have a bearing on national security and are the lifeblood of the national economy’.
Most elaborate of the 60 specific tasks laid down by the plenum was no. 14, which calls for ‘deepening reform of the science and technology system’
Section 13 of the plenum document is about ‘advancing the national security system and the modernisation of capacity’ and calls for ‘mutual positive reinforcement of high-quality development and high-level security’. Here there are two specific references to Artificial Intelligence (AI) and a pledge to establish an AI safety regulatory system. It talks about promoting security in ‘neighbouring regions’, speaks of overseas interests and investments, and deepening law enforcement cooperation, global security governance, and safeguarding the PRC’s maritime rights and interests, including strengthening ‘mechanisms for countering foreign sanctions, interference, and long-arm jurisdiction’.
The next section on the People’s Liberation Army’s ‘centenary goal’ specifically underscores the PLA’s loyalty towards the CCP, strengthening and upgrading the strategic deterrence forces, and the PLA’s nuclear arsenal. Interestingly, former Defence Minister Li Shangfu and former senior officers in the PLA Rocket Force Li Yuchao and Sun Jinming were expelled from the Party for serious disciplinary offences, even as the plenum was in session.
The problem with the Chinese is that they want both a socialist economy and a market economy to work in harmony as engines of growth. China grew at an unprecedented pace only after the economy was opened up and the non-socialist private sector was allowed to operate. The very concept of a ‘socialist market economy’ is fallacious. The preposition that ‘new quality productive forces’boosting productivity will also createtheir own demand implies that increasing production (naturally) increases consumption. The fact is, consumption creates demand, not the other way around.
An increase in productivity will result in falling prices. And with importers putting restrictions on Chinese goods to protect their own industries, it would lead to deflationary pressure, adversely affecting investment, and hence leading to unemployment and further reduction in consumption in the country. That’s market economics. Does socialist economics have a solution for this problem? Over the last several decades, low-tech Chinese exports were acceptable, but will the West be as accommodative when Chinese exporters come in direct competition in the high-tech arena? Already the cries for decoupling are becoming shriller. The CCP’s new policy thrust will only aggravate the situation.
Another problem of Chinese policymakers, typical of all communists, is that they firmly believeina state-directed approach towards industrial and economic development. This worked well in the past,when the West was going through a high-wage phase, and as long as China was not considered a technological threat, they had excellent economic ties with Beijing. But the subsidies culture helped China catchup in manufacturing, with the West generously providing know-how as well as investment.
Only an open market approach – allowing free market forces to play the winner-losers game – can help China clear out the mess ofbusinesses artificially propped up by the state and save the economy from a serious downturn. Will the communist bosses look beyond their socialist blinkers?
Yvonne Gill is a freelance journalist based in London