The event is being closely scrutinized. Until Thursday, July 18, the Chinese Communist Party is organizing its third plenum behind closed doors, a summit meeting held every five years that could lead to major directions, particularly on the economic front. And this, while China’s growth is slowing, against a backdrop of a real estate crisis, sluggish consumption and a high unemployment rate, particularly among young people. While China is expected to reaffirm its commitment to continuing its reforms, it is unlikely that it will reveal specific measures on this occasion, believes Philippe Aguignier, a researcher at the Montaigne Institute.
L’Express: A summit meeting is being held in China until Thursday. This third plenum should result in the major economic guidelines for the years to come. The meeting is all the more anticipated as the country is recording weaker growth than expected. Could it lead to major changes in Chinese policy?
Philippe Aguignier: The plenum deals with the broad guidelines. It does not cover day-to-day economic management. Nor is it the five-year plan, which sets specific goals. There could be surprises, given the economic situation, which is not great, but the most likely outcome is that it will lead to the reaffirmation of a number of principles formulated in a rather vague manner. What everyone is particularly looking for is a reaffirmation of the will to continue and deepen reforms. We can also expect it to be an opportunity to address the famous theme of “new productive forces”, which is now very present in Xi Jinping’s statements.
What does China mean by this expression?
Real estate has been the engine of Chinese growth so far. Some expect a stimulus package for this sector, but that would be very surprising. China is aware that construction and real estate will no longer be as important as before and is looking to replace them with these “new productive forces” as new growth drivers. Batteries, electric cars and solar panels are very high on this list. We can add everything that revolves around artificial intelligence and semiconductors, as well as aeronautics and aerospace. This is basically all new technologies. It is difficult to find a sector in which China is not making a special effort to occupy a leading position! As is often the case with Chinese leaders, this concept was released without being precisely defined and will be clarified, refined over time. It will be interesting to see what place it will be given in the current plenary session, as well as the emphasis that will be placed on the quality of growth, and therefore the attention paid to social problems.
China seems to be split in two, between a network of dynamic export companies and a population whose consumption is sluggish, against a backdrop of a real estate crisis and high youth unemployment. Will this plenum finally be an opportunity to address these social difficulties that are undermining the country?
Indeed, there is a kind of dichotomy between exports that are growing and a fairly mediocre economy. Domestic consumption remains low, which reflects concern and a lack of confidence in the economic outlook. The specter of deflation persists in China, knowing that it is established in real estate. All this is coupled with the challenge of preparing for the aging of the population, which will be a massive phenomenon in China and will require a considerable effort, particularly in terms of the pension system. All these problems cannot be completely ignored. But once again, we should not expect necessarily very precise measures in the context of a plenum.
At the same time, many economists are advising the Communist Party to change its growth model by rebalancing consumption and investment. The debate has been going on for years, but there is strong resistance at the top of the apparatus, partly for ideological reasons, since this would be a step down the path that led European countries to where they are today and whose model serves as a deterrent to Chinese leaders. Some observers are expecting a change in direction on the subject, but I remain skeptical. At the penultimate plenum, which took place shortly after he came to power in 2013, Xi Jinping presented himself as a reformer and defended the idea of a “dominant role for market forces in the allocation of resources.” It was a good idea and everyone saw what they wanted to see in it. But in hindsight, it is clear that market forces have been somewhat relegated to the doghouse in China.
Weak domestic demand and overcapacity have more than ever reinforced the weight of exports as the engine of Chinese growth. However, the flood of products made in China is causing serious tensions among its partners, such as the EU, which has raised its customs duties on electric vehicles produced in China. Can these retaliatory measures change the policy at work and push Beijing to worry about its domestic market?
Here again, it is not certain that this reflection will be mentioned in the documents of the plenum, which is mainly aimed at a domestic audience. Especially since the Chinese leaders believe that the time has not come to begin serious discussions with their partners that could lead them to make concessions. This is because the American presidential election is casting uncertainty over the position that the United States will adopt towards China, while in Europe, the Chinese tactic consists of playing on the divisions between member states. On electric cars, China considers that it has no interest in making concessions today since Chinese manufacturers will be required to provide new data that could lead the EU to revise customs duties. Not to mention that in the end, the text will have to be adopted at the political level and could be blocked if a sufficient number of countries oppose it. However, the subject is very sensitive in certain countries such as Germany, given the weight of its own car manufacturers on the Chinese market.
Foreign direct investment declined last year in China. Should we expect Beijing to step up its gestures in favor of investors? Does it have any arguments to attract them back, after the isolation it has locked itself in during Covid?
The Chinese industrial environment remains remarkably efficient. Whatever the sector, there is a network of efficient subcontractors. But there is also the worsening of the harassment that foreign companies are victims of on a daily basis, in contradiction with official speeches. Finally, with the resounding return of the geopolitical question in the investment decisions of large companies, I do not anticipate a short-term reversal in favor of China. The country is itself engaged in a strategy of reducing its dependence on the outside world and foreign investment, even if it continues to seek to attract investors in high technologies and will probably have very good words for them.
China has already successfully refocused its efforts in recent years on high value-added industries and technologies. Should we expect it to push its efforts further in this area? Does it have the means to outpace global competition in the areas it targets?
Part of the answer lies in the impressive progress China has already made. China’s capabilities should not be underestimated, even if delays persist in certain areas. This is the case in semiconductors, where China is struggling to position itself in the latest generation of chips. Their rise in artificial intelligence is also an open question. As for aeronautics, Comac’s C919 is not so Chinese as the country depends on foreign players for its critical components. The fundamental question for China is that of the compatibility between authoritarian political orientations and innovation, hence the difficulties the regime encounters in its relations with the private sector. The former seeks to benefit from the creativity of the latter while supervising it very strictly and pushing it to align its interests with the Communist Party. This is approaching the subject weighed down with weights on its feet.
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