China Congress: Economic trends to watch as Xi consolidates power

China’s economy is facing some of the worst headwinds in decades as the ruling Communist Party holds key congress.

Chinese President Xi Jinping is seeking an unprecedented third term as the economy is facing some of the worst headwinds in decades [File: Jason Lee/Reuters]

The 20th Chinese Communist Party (CCP) Congress that gets under way on Sunday will be closely watched for clues about the future direction of the world’s second-biggest economy.

The once-in-five-years gathering, at which Xi Jinping is set to secure an unprecedented third term in power that will set up him as potential president for life, comes as China’s economy is on a precarious footing.

After decades of rapid growth, China’s $18 trillion economy is facing some of the worst headwinds in decades, including draconian COVID-19 restrictions, Western sanctions, capital outflow and a deflating property bubble.

Here are three areas with implications for the Chinese economy to watch for at the key meeting.

Leadership changes

While there is little doubt that Xi will remain leader – either by staying on as general secretary of the seven-member Politburo Standing Committee (PSC), the CCP’s top decision-making body, or creating a new post such as party chairman – the congress will announce a host of leadership positions that have responsibility for economic policy.

Among the biggest questions is who will replace Chinese Premier Li Keqiang, the second-highest ranking official on the PSC, who has emerged as the most prominent voice on economic matters during the pandemic.

Li, who hails from a rival faction associated with former president Hu Jintao, announced in March that this year would be his last as premier, although he possibly could stay on as a member of PSC.

After being sidelined throughout Xi’s tenure, Li, a fluent English speaker who is well known among the foreign business community, gained prominence this year with dire warnings about the economy and the need for local officials to better balance pandemic curbs and growth.

While Li has not directly criticised Beijing’s ultra-strict “zero-COVID strategy”, his emphasis on the economy has fuelled speculation of a split within the party on how to manage the pandemic after nearly three years of punishing lockdowns, mass testing and border controls.

Li Keqiang
Chinese Premier Li Keqiang announced his intention to retire earlier this year [File: Jason Lee/Reuters]

Names mentioned as Li’s possible successor include Chen Miner, the top CCP official in Chongqing and a close confidant of Xi; Wang Yang, a former Guangdong province boss known for his relatively liberal and market-oriented outlook; and Hu Chunhua, a protégé of former President Hu who serves as a vice premier responsible for poverty alleviation, agriculture and trade.

Another key figure to watch is Vice Premier Liu He, Xi’s principal economic adviser, who is widely expected to retire from his position on the 25-member Politburo, the CCP’s second-most powerful body.

The Harvard-educated Liu, who is believed to have known Xi since childhood, has stressed the need for a sustainable growth model that prioritises mitigating economic risks, poverty reduction and environmental conservation.

Taylor Loeb, an economics and trade analyst at Trivium China, said Liu’s replacement potentially stands to be China’s most powerful economic official.

“The two most likely selectees are current National Development and Reform Commission chair He Lifeng and current China Banking and Insurance Regulatory Commission chair Guo Shuqing,” Loeb told Al Jazeera.

“If He takes Liu’s role, we’re likely looking at a more Xi-directed, state-centric economic policy. If it’s Guo, the bias will be toward increased capital account liberalisation and deleveraging.”

State control versus private enterprise

Under Xi, China’s economy has been brought under tighter state control.

After decades of market-oriented reforms initiated by his predecessors, Xi has repeatedly prioritised political control, national security, inequality and other concerns above economic growth.

“The key question for me is if the Chinese economy continues to be subordinated to what tends to come under the label ‘national security’ – meaning security of the status of Xi Jinping and the elites and the elite system that surrounds him – or if economic development and the wellbeing of Chinese citizens becomes the overarching objective,” Carsten Holz, an expert on the Chinese economy and professor at the Hong Kong University of Science and Technology, told Al Jazeera.

“I suspect we will continue to see ‘national security’ to be the dominant theme. The Chinese economy then only matters to the extent that it endangers or supports ‘national security.'”

Under Xi’s drive for “common prosperity”, authorities launched sweeping crackdowns to rein in industries ranging from education and property to gaming and tech.

During a 12-month period that overlapped with heightened regulatory scrutiny of giants such as Alibaba and Tencent, the tech sector’s 10 biggest players lost about $2 trillion in market value.

While Xi has framed the drive as an effort to tackle rising inequality, the crackdowns are widely seen as also aiming to head off any future challenges to the CCP’s monopoly on power.

Xi has also doubled down on “zero-COVID” lockdowns, mass testing and border controls, which continue to cripple economic activity even as the rest of the world lives with the virus.

China’s economy is expected to grow just 2.8 percent in 2022, according to the World Bank, which would be among its worst performances in decades.

“To date, ‘common prosperity’ has been a relatively nebulous concept: does it mean heavy-handed redistribution? Does it mean a more level playing field to improve equality of opportunity?” said Loeb.

“I expect we’ll get more intel on how exactly the party is thinking about ‘common prosperity’ at the congress, which will set the stage for how the policy is implemented in practice.”

Alicia García-Herrero, chief Asia Pacific economist at Natixis in Hong Kong, said she expected the congress to solidify the shift toward a state-driven economic model.

“We are starting to hear about a new concept, namely ‘people-oriented economy’ rather than market economy,” García-Herrero told Al Jazeera.

“This is clearly a very socialist concept with Chinese characteristics, which will acquire importance after the party congress. It is basically a justification of a state-driven economic model but putting people in front of the concept and opposing the market.

“Shared prosperity is the companion concept of a people-oriented economic model,” García-Herrero added.

“President Xi has already clarified that China has no intention to follow Europe with its welfare-state model but is looking for something different. In fact, shared prosperity is about the state playing an even more crucial role and avoiding excessive wealth concentrated in a few hands.”

Self-reliance versus globalisation

Despite presiding over a massive expansion in trade that helped double the size of China’s economy, Xi has stressed the need to boost economic self-reliance.

In speeches, the Chinese leader has called for greater self-sufficiency in sectors ranging from science and technology to energy, food and finance.

Xi’s calls for self-sufficiency have been driven, at least in part, by concern that China’s economy is vulnerable to attack by Western countries, especially the United States, which has rolled out a raft of sanctions to hobble Chinese tech firms, including semiconductor manufacturers.

For Xi, the risks of integration into the global economy have been further underscored by the Western-led sanctions imposed against Russia over its invasion of Ukraine.

zero COVID
China’s ultra-strict ‘zero-COVID’ policy has placed the economy under strain [File: Aly Song/Reuters]

At the same time, many foreign businesses view China as increasingly unwelcoming due to its harsh pandemic restrictions and rising hostility towards private enterprise and outside influence.

As China and the West increasingly view each other less as trading partners than a threat, economic decoupling is widely expected to continue, if not accelerate.

“A third term for Xi would cement the idea in Washington and other Western capitals that China’s political and economic divergence from the West will continue – making deeper economic engagement increasingly difficult, including in green technology supply chains where China has an edge,” Logan Wright and Agatha Kratz said in a recent commentary for Rhodium Group. “Nominations of technocrats seen as somewhat distant from Xi’s personal networks could revive hopes for an embrace of limited reform, but promise fatigue is real.”

Loeb said Beijing could use the congress to flag increased domestic investment in industries considered critical to China’s supply chain, especially in the tech sector.

“Beijing will double down on its drive for technological self-sufficiency and security vis-a-vis key resources, but we’ll be watching to see if policymakers discuss what role foreign enterprises will play – or not play – in those ambitions,” Loeb said.

García-Herrero said she expected the CCP gathering to double down on the message of self-reliance.

“In fact, China might not fully open – restrictions especially for outbound may remain – but this will be justified on the grounds of national security and this will also be a case of self-reliance,” she said.

Source: Al Jazeera