The Central Committee of the Communist Party of China will hold its III plenary session, an assembly traditionally faithful to economic issues. President Xi Jinping and the CCP opt for a moderate reaction to the deflation facing the Chinese economy. His reaction signals a shift toward an economy focused on domestic technological innovation and high-end manufacturing.
The Third Plenum of 1978 is known for pronouncing Deng Xiaoping’s market position reforms that moved China away from Mao Zedong’s planned economy. Xi’s first Third Plenum took a position in 2013, when he also defined a policy of liberalization of the market position. While the effects of those promises have been diluted and combined in practice, they have also increased the role of the CCP in the functioning of the state. This year’s plenum will most likely contain nothing extraordinary, but it may provide valuable insight into Xi’s plans for China’s future.
Deflation is slowing the Chinese economy, as costs fall for customers and wage cuts are common. This has led to difficulties for Chinese exports and the exit of foreign investors, as economic activity stagnates and debts rise.
This deflation finds its immediate origin in the real estate crisis observed in the collapse of companies such as Evergrande. The Chinese government’s reaction to these deflationary pressures is also the result of the bursting of the real estate bubble. In 2008, China experienced deflation due to the global recession. The CCP then flooded the market with cash to combat deflation and created a housing bubble that burst.
Remembering how last time’s gigantic stimulus and declining interest rates hurt them, Xi and the CCP must pivot the economy. The Chinese economy, since its liberalization, has been based on the expansion of the productive sector thanks to gigantic investments and gigantic debts. Even without the housing bubble, the Chinese economy would face deflationary pressures from less expensive foreign production industries.
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For this reason, Xi spoke of creating “new productive forces”. Instead of focusing on investment-driven production expansion, the CCP needs to move China toward an economy driven by domestic technological innovation that boosts high-end output. This would increase wages and domestic income and increase China’s dependence on foreign markets.
Basically, Xi and the CCP aim to avoid the middle-income trap and push China toward a service economy developed through state management. It faces a complicated scenario as its population ages and industries struggle to increase productivity. Japan found itself in a similar scenario in the 1990s and has struggled to bring economic growth to life ever since. Regardless, it will be vital for the United States to keep an eye on the good fortune of this economic plan in the coming years.