Five Facts to Know: China's Economic Outlook After the Party Congress
Communist Party General Secretary Xi Jinping recently announced his new political lineup of the most powerful men in China. The new leadership will face no shortage of significant challenges in the economy. Cheaper exports have driven growth but will slow with a global recession. The real estate market is still under pressure, local debt is rising, youth unemployment is around 20% and zero-Covid policies have hampered economic growth. Xi will need to find ways to unlock consumption, which is challenging given an uncertain outlook ahead for economic growth and Covid still a concern in China.
Here are five things to know about China’s economy:
1. Security and stability are emphasized over economic growth.
Xi referenced “national security” over 90 times during his work report, compared to the use of "the economy" only 60 times. For comparison, Deng Xiaoping, when launching his “reform and opening up campaign” used the term “economy” over 195 times. There is a shift from full-throttle economic development to a willingness to tolerate slower growth, reduce dependence on Western markets and focus on solidifying relationships internationally as a counterweight to the United States.
2. The Party will play an increasing role in the economy.
Concerns about the continuing crackdowns on tech companies as well as the political nature of the current leadership caused China stocks — and stocks of firms vested in China — to drop significantly last week. During his last two terms, Xi established the Party as the driver of economic policy, developed through “economic leading groups of Party members” and then implemented by the government. At the Party Congress, he reiterated his focus on “Common Prosperity” which aims to address China’s widening income gap and introduced more measures to control the private sector, such as caps to private sector salaries and pressure for firms to “give back” to the country through philanthropy. These steps contradict the need to support entrepreneurship and to support SMEs, which account for roughly 60% of job growth in China.
3. Xi is anticipating a more hostile geopolitical environment.
He warned of darker times ahead, where “uncertainty and unpredictable factors are increasing” related to China’s development and “all types of ‘black swan’ and ‘gray rhino’ incidents can occur at any time.” He noted that China must “be ready to withstand high winds, choppy waters, and even dangerous storms.” These warnings come as Western governments are taking new efforts to decouple their economies from China. The United States recently announced an aggressive policy that imposes additional restrictions on the supply of US semiconductor equipment — and individuals with knowledge of this technology — to China. It has indicated that more restrictions will be introduced on emerging technologies such as quantum computing and artificial intelligence.
4. Xi reaffirmed opportunities for foreign firms.
In his statement to the Congress, Xi reiterated that development was the “top priority” and emphasized “high-quality growth.” And while the United Kingdom and European Union have been reassessing their relationship with China, Germany’s Olaf Scholz is planning to visit on November 3-4, the first visit by a G7 leader. Rumor has it that French President Macron will also travel to China in the not-too-distant future. President Xi is also planning a visit to Saudi Arabia and plans to take a delegation of Chinese firms with him to the November G20 meetings in Indonesia.
5. It is important not to make assumptions - either way.
Li Qiang, former party secretary of Shanghai, is well positioned to become the Premier when the government positions are announced in March. In China, the government reports to the Premier, not the President, so Li will play an important role in guiding China through the tough economic headwinds it is facing. Although this will be Li’s first position at a national level, he — and fellow Beijing Party Secretary Cai Qi — have managed major cities or provinces which are known for being entrepreneurial. They also have ties to foreign businesses that have been big investors in their region. However, they are not as well known internationally as some of their predecessors. Both have been viewed as “business friendly” during their time in office but how they will perform at this higher level remains to be seen.