Sara Hsu

From July 15-18, the 20th Central Committee of the Chinese Communist Party – the top governing body of China’s ruling party – will convene for its much-anticipated “third plenum.” Since the beginning of the reform and opening era, each Central Committee’s third plenum has long set the policy direction for China’s economy. However, this iteration will happen far behind the usual schedule. Traditionally, the third plenum convenes a year after the CCP's National Party Congress, last held in October 2022. Accordingly, the third plenum was expected in October or November of 2023. Instead, it was delayed until July 2024.

The nine-month gap between the expected timing and the actual convening of the plenum sparked much speculation about debate and disagreement regarding economic policy occurring within the black box of the CCP. To help set the scene, The Diplomat’s Shannon Tiezzi interviewed Sara Hsu, an associate professor at the University of Tennessee, Knoxville, and an expert on China’s supply chains, fintech, and economic development, about China’s economic trajectory since the 20th National Party Congress in the fall of 2022.

Hsu explained that China’s economy faces two equally daunting challenges: internal structural issues and a hostile external environment. “China’s ongoing government-backed economic policy is viewed by the United States in particular as a threat to national security,” she said. “...This is at least as much of a barrier to growth as China’s internal issues.”

China’s government and the CCP insist that the economy is not facing any serious struggles, while many external analysts are convinced there are major structural deficits that need to be addressed urgently. How would you evaluate the current health of China’s economy?

Not only are there structural deficits in China’s economy that need to be addressed, but there is an economic ideological clash with the West that will prevent China’s government-led growth path from reaching success.

The structural deficits are related to China’s growth slowdown in the real estate sector, aging population, excessive local government debt, and youth unemployment. These issues have been discussed and in the making for years. However, it is China’s overall economic strategy that reflects a contrasting stance with the West.

A major issue is that just as China is promoting areas such as electric vehicles, lithium batteries, and solar cells, the West sees China’s government support for these industries as a threat and has increased tariffs accordingly. China’s ongoing government-backed economic policy is viewed by the United States in particular as a threat to national security, as many of China’s recent policy measures have backed innovative industries. This has led to major improvements in technology as well as in overcapacity in some areas.

The U.S. is concerned that China will flood the U.S. market with innovative products that may present a security risk. This is at least as much of a barrier to growth as China’s internal issues.

China seems to be betting big on the “new three” export pillars – electric vehicles, lithium batteries, and solar cells – to keep its economy going strong. But the U.S. and especially Europe have been increasingly vocal in their warnings about “overcapacity” in these industries, suggesting China’s access to these markets might face obstacles. How do you think China will respond to the tension between its economic strategy and the conflicting goals of its trade partners?

China may respond with tariffs of its own, although in recent years it has refrained from imposing tariffs that are equally high. China has doubled down on its economic strategy of state-led growth, which has been the main focus for decades. As it was only in the run-up to the U.S.-China trade war that the U.S. began to fear China's government-led strategy, the American response to China's economic ideology is a more recent development.

This is to say that I believe China will continue on its current trajectory and continue to view the response of its trading partners as hostile. Unfortunately, the conflicting perspectives will prevent China from growing more significantly in the areas it hopes to promote.

Other than the “new three,” what are the current buzzwords that help us make sense of China's economy policy direction?

“AI Plus” is another buzzword. The idea is to integrate AI into business in order to promote innovation. The hope is that this will become another source of economic growth. This is related to China’s desire to grow its digital economy.

It is reminiscent of China’s “Internet Plus” strategy, which sought to increase connectivity among industries and geographies. Both AI and the internet are considered productivity boosters that can spur economic growth.

Again, however, AI is another area of strategic competition with the U.S., and China's endeavors in AI are considered one of the biggest threats to U.S. national security.

How has the relationship between China’s party-state and private enterprises and markets changed under Xi Jinping?

China began to expand its private sector just before accession to the WTO, but since Xi Jinping was ushered into office, the emphasis has been on state enterprise first. Private enterprises have found their way forward by associating with the government. Attempting to go it alone has proven difficult, especially during crackdowns on private sector industries such as technology and tutoring. Government favoritism of the state sector has also reduced investment in the private sector due to increased risk perception.

The third plenum of the 18th Central Committee of the CCP, in 2013, excited analysts over its talk of economic reform, especially an expanded role for the market in China's economy. Over 10 years later, how has Xi Jinping's government approached the policy promises made at the 2013 third plenum?

Some of the policy promises have been fulfilled, while other areas, such as an expanded role for the market, have not. China did promote mixed ownership of SOEs [state-owned enterprises] to access private capital and expanded the Silk Road to strengthen economic relationships with its neighbors.

With that background in mind, how should analysts and observers approach the outcomes of the upcoming third plenum of the 20th Central Committee?

We can likely expect more of the same from the third plenum of the 20th Central Committee, not major market-oriented reform. We will continue to see an emphasis on new technologies and on development of particular regions. The government is still concerned about stability, as it should be, so continuing to stabilize the housing market and other areas is essential. The approach has been and is likely to be state-led innovation and development.

Will it be effective in promoting economic growth? Probably as effective as it has been in recent years, which is not very much. It is not an approach that is a strong complement to the changing views of China’s Western trading partners and is even often in conflict with them.

The state-led approach will also not provide as strong a source of growth as a private-led approach would. It has been shown across numerous scholarly studies of China that private sector economic growth is faster and more efficient. Unfortunately, promoting the private sector is probably not in the works.

This is a shame, because China is struggling with many headwinds, such as a real estate crisis, vestiges of the zero COVID policy, Western economic opposition, and youth unemployment. The country needs better sources of growth to fully get through the transformation to a higher value added, higher income economy.