Chinese officials acknowledged that implementing their ambitious economic policies will face significant challenges, citing “many complex contradictions” in their economic goals. These remarks followed a critical Communist Party meeting led by President Xi Jinping, where China’s leadership reiterated the country’s priorities for modernizing its industrial complex, expanding domestic demand, and stimulating growth while managing debt risks. However, concerns are growing both domestically and internationally about the feasibility of achieving these objectives simultaneously, particularly given the rising pressure for deep structural changes in how China’s economy functions.
The meeting, known as the plenum, is held once every five years and is a key event in setting the economic and political agenda for China. The most recent meeting emphasized China’s commitment to various long-standing goals, including boosting industrial productivity, addressing debt concerns, and ensuring social stability. However, the plenum did not provide specific details on how these goals would be reconciled, leaving questions about how China will manage the competing demands of stimulating consumer spending while continuing to direct resources primarily toward producers and infrastructure projects.
Contradictions in Economic Policy
Chinese officials have long grappled with contradictions in their economic strategies, and the latest plenum underscored these ongoing challenges. The government aims to modernize China’s industrial sector and enhance its global competitiveness, but this often comes at the expense of fostering domestic consumption, which many economists argue is crucial for long-term sustainable growth.
Julian Evans-Pritchard, head of China economics at Capital Economics, warned that China’s current policy trajectory could lead to a prolonged period of low growth and persistent deflationary pressures, similar to Japan’s economic stagnation since the 1990s. “High debt levels plus increasing deflationary pressures eventually could result in a Japan-style … low growth and very low inflation,” he said. While such a scenario may not materialize immediately, the risk is growing unless there is a significant shift in policy direction.
Despite these risks, Chinese leaders have continued to prioritize industrial output and external demand over domestic consumption. This reliance on production and export-led growth has contributed to China’s rise as a global economic power, but it has also created vulnerabilities, particularly as global leaders grow increasingly wary of China’s dominance in key industries.
Challenges in Domestic and Global Sentiment
Domestically, both consumer and business sentiment are near record lows, reflecting widespread uncertainty about the future of China’s economy. The second quarter of this year saw slower-than-expected growth, with industrial output and external demand propping up the economy while domestic weaknesses persisted. Many Chinese consumers remain cautious about spending, exacerbating the challenges facing policymakers who are trying to shift more economic activity toward domestic demand.
On the international front, global leaders have expressed growing concerns about China’s economic dominance, particularly in the realm of exports. This has led to increasing tensions with major economies like the United States and the European Union, which are seeking to reduce their reliance on Chinese goods and diversify their supply chains.
The European Union Chamber of Commerce in China noted that while it was “positive that China’s leadership has again acknowledged many of the headwinds facing the country’s economy,” the outcome of the plenum largely reiterated existing policies without offering new solutions. The chamber expressed concern that China’s focus on balancing economic recovery with national security concerns and social stability could limit the scope for necessary economic reforms.
Industrial Modernization vs. Household Spending
A major source of tension in China’s economic policy is the government’s focus on industrial modernization and technological advancement, which is seen as critical to maintaining China’s global competitiveness and avoiding the so-called “middle-income trap.” The plenum reaffirmed China’s commitment to “new productive forces,” a concept introduced by Xi Jinping that emphasizes scientific research and technological breakthroughs as drivers of industrial expansion.
However, this emphasis on the supply side of the economy has come at the expense of boosting household consumption. As Moody’s Analytics economist Harry Murphy Cruise pointed out, “There is still tension between expanding the supply side of the economy and boosting household spending.” While the plenum’s communique focused heavily on industrial transformation and technological innovation, it mentioned support for household wellbeing only briefly and toward the end of the document.
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Many analysts argue that without a significant shift toward policies that empower consumers, China will continue to face the risk of debt outpacing growth. In recent years, Beijing has funneled resources into infrastructure and real estate development, leading to unsustainable levels of debt among local governments. Although these investments have helped fuel China’s rapid urbanization and industrialization, they have not created the kind of broad-based growth that would benefit ordinary Chinese citizens.
Disappointment Over Lack of New Directions
Despite the high expectations surrounding the plenum, many economists and market watchers were left disappointed by the lack of new policy directions. Alicia Garcia Herrero, chief economist for the Asia-Pacific region at Natixis, described the meeting’s outcome as “really disappointing.” She noted that the announcements largely followed the same industrial policies that have been in place for years, with little attention given to market forces or consumption-led growth.
“There’s really no change in direction, no consumption-led growth, nothing. No sentence on the power of market forces, nothing,” Garcia Herrero said. This lack of innovation in policy has done little to boost market sentiment, with Chinese stocks remaining flat following the plenum, hovering just above five-year lows.
In the aftermath of a similar plenum in 2013, Beijing had launched an ambitious policy agenda that included many of the same goals announced this week, along with a push to liberalize financial markets and make domestic consumption a more prominent driver of growth. However, a capital outflows scare in 2015 derailed many of these plans, and in recent years, national security considerations have taken precedence over economic liberalization.
National Security and Regulatory Crackdowns
Since 2015, China’s economic policy has increasingly been shaped by concerns over national security and social stability, leading to tighter control over key sectors of the economy. Regulatory crackdowns on industries such as tech and finance have further concentrated power in the hands of the central government, making it more difficult for market forces to drive growth.
Beijing’s focus on industrial modernization, particularly in advanced manufacturing, is part of its strategy to maintain control over the economy while achieving its long-term goal of becoming a global technology leader. However, this approach has sidelined household demand, with many local governments accumulating unsustainable levels of debt in their efforts to finance infrastructure and real estate projects.
Looking ahead, China’s leadership appears committed to its current path of industrial expansion and technological innovation, even as analysts warn of the risks of persistent low growth and deflation. The coming days are expected to bring more detailed policy documents that may offer further insights into how Beijing plans to address these challenges, but for now, the road ahead looks uncertain.
Conclusion
As Chinese officials acknowledged this week, the country’s economic goals are fraught with contradictions and challenges. The need to balance industrial modernization with domestic consumption, stimulate growth while managing debt risks, and ensure social stability while pursuing global prominence all present significant hurdles for policymakers. While the plenum reaffirmed China’s commitment to its long-standing economic priorities, many economists and market watchers remain skeptical about the government’s ability to implement these policies successfully without a fundamental shift in direction. For now, China faces a bumpy road ahead in its quest to achieve its economic ambitions.
