China is struggling to shift towards a more sustainable development model driven by consumption and innovation. Whenever things get hard, the government keeps returning to bad habits, resorting to heavy supply-side stimulus to boost stalling GDP growth, though in the last decade it has become slightly more mindful of financial risk build up.
There is wide consensus that China’s period of relatively easy catch-up growth is ending. China’s current growth model, fueled largely by exports, investment and debt, is not sustainable. The government has long called for a shift to an economy that is more driven by domestic demand, but it has failed to give up the kind of state control the current model allows. Any such change implies leaving a larger share of wealth to consumers, who might not spend their incomes as Beijing wants them to.
Drivers and dynamics
The party-state’s declared wish to overcome long-standing structural challenges is at odds with how Beijing generally intervenes in the economy. In his 20th Party Congress report, Xi Jinping was explicit about tackling oft-mentioned key problems, such as reducing inequality, strengthening SMEs, reforming pensions, promoting regional development, and liberalizing China’s capital account. This begs the question of whether Xi’s third term can prove itself different from so many previous generations of leadership. Will any of these goals finally be realized?
Xi will have to overcome many of the challenges that stalled past reform efforts, such as strong vested interests, a perennial focus on stability, the many real risks that could undercut development, and certain factors unique to China’s style of policymaking and implementation. However, in a third term, an increasingly powerful and authoritarian Xi could use his unquestioned strength to push an agenda through, no matter the vested interests or risks to stability. Similarly, his exclusively loyalist politburo may be able to hold frank conversations that wouldn’t happen if ‘rivals’ listened in. Or it could just as easily become an echo-chamber of yes-men.
Finally, Xi’s grip on power may give him the best opportunity to advance the hard reforms that China needs. However, Xi will have to do so amid unprecedented challenges not faced by his predecessors. At home, Xi faces slower growth and less demand for more infrastructure. Meanwhile, the many, complex risks from abroad include escalating tension between Beijing and Tokyo, tensions over Taiwan, and with the United States and EU (to name just a few).