The Third Plenum of the 20th Central Committee of the Communist Party of China (CCP), a closed-door event led by President Xi Jinping, failed to produce any major announcements aimed at boosting economic growth and did not provide any short-term solutions to the chronic problems plaguing the world’s second-largest economy. However, the determination to “strive unwaveringly” which reiterated the commitment to meeting this year’s growth targets, an unusually short-term and targeted proposition for CCP rhetoric, suggests the possibility of more state support to ensure China meets its growth target: the now-familiar “about 5%”.
There are those who have read “anxiety” in this emphasis that allows us to perceive a tension among the Party leaders, which could lead to more aggressive political interventions.
The Middle Kingdom is facing headwinds on multiple fronts, including slow economic growth, high youth unemployment and geopolitical pressures: the feeling of consumers and businesses is near historic lows nationwide.
If global leaders are increasingly concerned about Chinese manufacturing supremacy and overproduction, what emerges from the Plenum is that the future battleground will be the industries of the future, driven by cutting-edge technologies, currently in the incubation phase or at the beginning of industrialization, with strategic, leadership and potentially disruptive characteristics.
Competition is now focused on aspects that go beyond manufacturing supremacy and instead invest in technology. Increasingly, Western companies perceive Beijing not as a preferred producer but rather as a rival in the development and control of technology.
This has repercussions on several distinct levels: control of industrial chains can pay off handsomely in both commercial and strategic dividends, with significant implications for national and economic security for the losers. In terms of profits, due to the logic of comparative advantage, most of the profits go to those who control the technology, not those who produce it: Foxconn produces iPhones but has a slim margin of profits that go to Apple. Taiwan’s dominance in producing the world’s most advanced chips makes it a reasonably profitable giant foundry, also considering its global domination of the supply chain, but most of the profits go to those who own the intellectual property of the chips.
Artificial intelligence (AI) requires computing power. Computing power requires powerful chips. And right now, China is doing everything it can to maintain access to Western chips.
China’s vulnerability in the AI sector lies in its dependence on foreign chips: Chinese patents are mostly concentrated in applications at the medium and low levels of the industrial chain.
Western chip export restrictions are starting to squeeze China’s AI industry, judging by usage limits imposed on Chinese tech companies and AI startups, most notably Alibaba Cloud.
Hence the importance for the Chinese Communist Party of “facilitating breakthrough discoveries in technology”: today’s future is tomorrow’s present. A lesson that the West, today, seems to be slowly beginning to understand by looking back. The emerging strategic industries of the past were the industries of the future of that time, and Beijing believed in it before those who promoted it in the West. The current strategic Chinese industries represented by the “new three“, batteries, electric vehicles, solar panels, have “overtaken the curve” of the Western ones because at that time they were able to grasp the future: developing the industries of the future means continuing to compete for the future.
The Plenum confirms that the government has, for some time now, drastically changed its vision of the value of its real estate sector: from an economic engine to a risk to be defused. However, the new engines of economic growth, the “old” industries of the future, they do not yet seem able to fill the void: “the new three” they are not able to assume, at least in the short term, the same dimensions, 19.4%, in terms of GDP.
At the heart of the reforms is a push to accelerate China’s scientific and technological development: a mission-critical for the nation’s economic transition, where the size of its digital economy is second only to that of the United States.
China has rapidly moved up the global value chain with rapid progress in technological development: in terms of innovation, it was ranked the most innovative nation by the World Intellectual Property Organization last year, up from 35th in 2013, and is now leading the way. green transition of the Planet.
However, as Xi has often said in recent years, the easy part of the reform is over, and now the navigation is in deep and uncharted waters. After Deng Xiaoping’s reforms with the construction of the “World Factory”, the party must now be careful where it steps, especially when the vested interests of many internal groups are affected.
Beijing’s contentious agenda is no stranger to today; its commitment to letting markets play decisive roles in allocating resources has been conditioned by the dominance of large, state-controlled corporations (SOEs) and public ownership.
The Dragon has found that it is not prepared to pay the painful price of fighting entrenched interests that are difficult to eradicate: local governments and SOEs have a vested interest in slowing reform and preventing markets from playing decisive roles in allocating resources. And over the past two years, the share of SOEs among China’s top 100 listed companies, by aggregate market capitalization, has increased from 31.2% to 50%. The growth of state ownership has been most pronounced in the financial and technology sectors.
Among the unresolved issues remains the growth driven by domestic consumption, which cannot take off without a reform of the economic system that reduces the restrictive measures that compromise rights and fair competition. These effects are reflected in the dissatisfaction of a large part of the population that, according to a twenty-year research by Big Data China, has become more inclined to blame poverty on an unjust and unequal economic system, rather than on their own lack of ability.
Also weighing on Beijing’s objectives is deglobalization and the deterioration of China’s ties with the West, which is manifesting itself on the trade and technology fronts.
And while revitalizing the economy involves building better relationships with foreign investors and increasing private sector confidence, the stark reality in China is that security trumps everything from economics to diplomacy, resulting in reforms giving way to geopolitical rivalries.
Security undermines economic goals at the same time that China seeks to attract more investments: foreign investors are faced with geopolitical choices of de-risking, if not explicitly decoupling, by two important trading partners such as the EU and the United States, where a new President is emerging…
