China Girds for Tough Times by Andrew Sheng & Xiao Geng – Project Syndicate

Historically, China has carried out its most important reforms in times of crisis. The mandate given by the Communist Party’s 20th National Congress and President Xi Jinping to his closest allies is in keeping with this pattern.
HONG KONG – Last month, the world’s attention was focused on the 20th National Congress of the Communist Party of China (CPC). Beyond the headline-grabbing developments – especially President Xi Jinping’s confirmation for a third term in power – the Congress delivered a sobering report in which Xi argued that, amid unprecedented external and internal challenges, the Party and the nation must prepare for tougher times ahead.
As expected, Chinese President Xi Jinping has been given an unprecedented third five-year term. More surprising was the absence of any sign that Xi intends to revise the policies that have done so much economic damage in recent years.
In his first two terms, Xi focused, first, on consolidating power and rooting out corruption. In terms of social and economic policy, his main priority was eradicating absolute poverty and building a “moderately prosperous society” (xiao kang). But over the next five years, Xi will plan a dramatic shift in Chinese policy, making improved national security, rather than economic development, the primary goal of his administration. The economy is to serve national security by achieving self-reliance in key technologies and materials – for example, semiconductors – as part of Xi’s Made in China 2025 strategy.
China’s economy is, of course, being buffeted by significant headwinds. In the third quarter of 2022, economic growth remained sluggish, at 3.9%, not least because of the zero-COVID policy, which has meant lockdowns for many cities and regions. The real-estate market is increasingly precarious, and the stock market reached record lows after the Congress. Unemployment is on the rise.
At the same time, China’s international relations are increasingly tense. America’s imposition of sweeping new restrictions on the sale of semiconductors to China is just the latest escalation in a trade and technology war between the world’s two largest economies. Warnings from senior US officials that America must prepare for a Chinese invasion of Taiwan further exacerbate tensions.
The United States strongly opposes a Taiwanese declaration of independence – and for good reason: Almost all Chinese would regard it as a declaration of war on China. Such an event would be truly disastrous for the world, as it could easily escalate into a nuclear conflict. The Taiwan issue thus needs to be handled sensitively, with neither side seeking to heighten friction.
As the political scientist Zheng Yongnian presciently observed in 2019, China is at risk of falling into two traps: the middle-income trap and the Thucydides trap. Avoiding them, and building a prosperous, modern, secure, and people-centered China, will require effective and wise leadership. That the new leadership is united behind Xi cannot be doubted, as many worked closely with him in Fujian, Zhejiang, and Shanghai before his elevation to the central leadership.
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New members of the Politburo Standing Committee include the likely next premier, Li Qiang, who served until recently as the CPC Secretary of Shanghai, and the likely next first vice premier, Ding Xuexiang, Xi’s former chief of staff. The CPC secretaries of Guangdong and Beijing – Li Xi and Cai Qi, respectively – are also joining the party’s top leadership group.
The returning Standing Committee members have similarly strong ties with Xi. Wang Huning – who is likely to chair the National Political Consultative Conference – has served as a trusted political adviser not only to Xi, but also to Xi’s predecessors, Jiang Zemin and Hu Jintao. Zhao Leji – who will probably chair the next National People’s Congress – was head of the anti-corruption body during Xi’s last term.
Promotion to a senior position at the national and provincial levels depends on an official’s election to the Central Committee, which includes 203 full members and 168 alternative members. While the number of Central Committee members coming from foreign institutions of higher education (or the financial sector) has declined, it is not negligible. For example, Yin Yong, former deputy governor of the People’s Bank of China, studied at Harvard University. He Lifeng, the current head of China’s state planning agency and likely next vice premier, studied in both China and the US.
This suggests that China’s leaders recognize the importance of re-engaging with foreign economic and financial stakeholders. In fact, given the tough external economic environment – with a looming global recession and a stronger US dollar – the new leadership team will be courting business and foreign investors and trading partners as part of an effort to boost growth. Li Qiang, who is credited with bringing a Tesla factory to Shanghai, has plenty of experience managing external economic relations.
At the same time, China’s leadership will be strengthening incentives for local officials and private entrepreneurs to stimulate Chinese business and bolster employment. And they will work to reduce the costs of the zero-COVID strategy, which has hit small and medium-size enterprises, the personal services sector, and commercial real estate particularly hard.
To restore consumer and business confidence, fiscal and monetary tools will have to be used more aggressively to revive trade, investment, incomes, and consumption. Fortunately, China has the necessary fiscal and monetary space to deal with potential demand and growth shocks. Long-term structural challenges – such as rising demand for health care and retirement benefits, the green-development imperative, and issues with local-government funding – must also urgently be addressed.
Historically, China has carried out its most important reforms in times of crisis. The 20th Congress has given the country’s leadership an unambiguous mandate to make the tough decisions that tough times demand. Whether they succeed or fail, the entire world will feel the effects.
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Writing for PS since 2011
130 Commentaries

Andrew Sheng, a distinguished fellow at the Asia Global Institute at the University of Hong Kong, is a member of the UNEP Advisory Council on Sustainable Finance.
Writing for PS since 2012
120 Commentaries

Xiao Geng, Chairman of the Hong Kong Institution for International Finance, is a professor and Director of the Institute of Policy and Practice at the Shenzhen Finance Institute at The Chinese University of Hong Kong, Shenzhen.
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