China’s plan to defeat the West The CCP has revealed its new economic strategy

Last month’s gathering was, therefore, awaited eagerly. What would the Party say about the trenchant and inter-related issues concerning its faltering economic development model at home, rising trade tensions with the US, the EU and other countries, and the ubiquitous significance of national security and geopolitics?

As usual, the Third Plenum documents, which have since been released, heap praise on the Party for its successes and guidance over the last several years. They proposed 300 or so measures, which the Party hopes to have completed by 2029, and which will help to steer China to become a “high-level socialist market economy” by 2035, en route to becoming the dominant global power by 2049 — to coincide with the centenary of the founding of the People’s Republic. 

One could imagine that great ambition would focus the minds of the leadership on addressing many of the most pressing economic problems, such as job creation for young people or a financial package to stabilise the real estate market and encourage home-buying optimism. In practice, though, the government doesn’t see things this way. At the Plenum, as before, its central message was that national security is as, if not more, important as economic policy, and that the two are inseparable. In one document, Xi expanded on the Plenum’s deliberations by saying that “higher priority to national security provides a pivotal foundation for ensuring steady and sustained progress in Chinese modernisation”, and that China’s industrial system, which is already such a large part of the Chinese economy and global manufacturing, suffers from “over-reliance on key and core technologies controlled by others”. 

The re-emphasis of this linkage between national security and the economy means that the fundamental tenets of economic policy are not going to change. Reforms will be implemented not to change course, but to underscore existing commitments to the Party’s focus on industrial policy and underpin investment, rather than bolster the consumption share of national income. 

Does this mean it is oblivious to the needs of the Chinese people, or the very serious economic challenges it faces? The CCP certainly wants to improve people’s livelihoods, paying attention to the quality of growth, if not the quantity, and to lowering inequality, improving income distribution, and providing some relief to soaring healthcare costs. There may be other nods to what Xi has called “Common Prosperity”, such as a rise in pension benefits, reforms to the hukou residency permit system that would give social benefits to more of China’s 290 million or so migrant workers, and allowing migrant workers with urban permits to sell their rural land rights. 

However, such initiatives, some of which are already in place, are unlikely to be transformational, and it is noteworthy that there was almost nothing new as far as the beleaguered real estate sector is concerned. Instead, the government insists that collective economic and spiritual prosperity will flow from successful industrial policies, compliant domestic firms, and greater self-reliance. 

Chinese leaders also want to improve efficiency and governance as they continue to develop “socialism with Chinese characteristics”, in which market forces and mechanisms also strengthen the primacy of the public sector and state firms. To this end, one proposal is to pass a “private sector promotion” law. Yet, while this and other initiatives to assure private firms and entrepreneurs might be designed to win back their commitment and enthusiasm, the Party does not mince its words. It wants to bolster state enterprise efficiencies and organisational capacities, insisting on “unswervingly developing the public economy” and a total commitment to Marxism, the CCP and its political goals.

As it makes clear, the CCP is determined to modernise China by pursuing “high-quality development”. This is code for industrial policy, and specifically for allocating state capital towards new technologies and advanced science, especially those deemed key to national security, and defined as strategic emerging industries, such as information, industrial machinery and biotechnology. State-owned enterprises will be in the vanguard of these efforts, while there will be increased state investment, funding and “guidance” over private firms. 

Here, efficiency and profitability are subordinate objectives, if they figure at all. The primary goal is to build up domestic capacity and become less reliant on the United States and its allies, and to develop dominance in science and technology. By so doing, Xi thinks China can also fulfil essential geopolitical ambition, namely to lead what he calls the fourth industrial revolution, and terminate America’s leadership role in the global system. 

The confluence of economic and technological progress on the one hand, and geopolitical advantage on the other is not accidental. The CCP insists that China’s failure to keep up with the pioneers of the Industrial Revolution was due to what it calls the “century of humiliation” — in which foreign imperial powers, such as Britain, Japan, France, Germany and the US, carved up China and imposed damaging treaties and financial hardship. According to this (incomplete) narrative, history will not be repeated and the CCP intends for China to emerge well from what Xi reflects today as “great changes, unseen in over a century”.

Yet, even though China is the world’s leading manufacturing nation, accounting for about a third of the global total, this high-quality development strategy is not certain, or likely, to deliver the type of economic surge China needs and expects. Aside from persistent questions about the efficiencies, commercial viability, and innovative depth in targeted industries, its rigid political structure, controlling governance, and closely state-run institutions certainly appear to present constraints. It is also running into push-back from other countries — not just the US and EU but also Turkey, Brazil and Indonesia — against the mercantilist trade consequences of its industrial policies. In other words, given China’s already strong export status, it can only bolster its manufacturing and exports by imposing significant trade and economic costs on those to whom it wants to export more. 

And perhaps most damningly, even on the scale on which it is likely to be implemented, China cannot guarantee that it will do two important things. First, its focus on national champions and top-down industrial initiatives are no substitute for a properly integrated technology ecosystem that reaches all parts of the economy, including all the “boring” bits such as wholesaling, retailing and distribution. Second, this type of industrial policy is no panacea for an economy that still needs much macroeconomic care and attention. 

After all, it is not exceptional, historically, for countries to excel in various forms of industrial and scientific endeavour but to be undone eventually by macroeconomic imbalances, debt capacity constraints and inflexible institutions. The USSR in the Sixties and Seventies, and Japan in and after the Eighties, both examples in their own ways. China is shaping up, over time, to probably follow suit. 

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George Magnus an economist and author of Red Flags: Why Xi’s China is in Jeopardy. He is an Associate at the China Centre at Oxford University.

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