Today saw the opening of the Chinese People’s Political Consultative Conference – an advisory body to the country’s rubber-stamp parliament,  the National People’s Congress, which will begin its annual session tomorrow. The “two sessions” will not only set out China’s next five-year plan but also flesh out Xi Jinping’s “2035 Vision”. 

By 2035, China sees itself replacing the US as the world’s largest economy. But to judge how likely this is, it is important to understand a pivotal change under Xi. 

As we have argued for some time now, Xi rules supreme after achieving a sweeping centralisation of power. This was accompanied by a drive to reinvigorate ideological commitment within the Party and ideological conformity within society more generally.

Importantly, under Xi there’s been a decisive shift of emphasis towards prioritising security over growth.     

During the tenures of Deng Xiaoping, Jiang Zemin and Hu Jintao the economy ministries were pre-eminent while the security ministries were distrusted and held in low regard. The key criterion for promotion within the Party elite was the ability to deliver economic growth. 

But since coming to power, Xi, while still placing importance on economic development, has reframed it within an all-encompassing concept of national security. Security and development are now seen as inextricably linked and security trumps all other considerations. 

Xi’s five-year plan and 15-year vision should be analysed first and foremost through the prism of the dominant role of national security in achieving the “China Dream”.

In addressing security, Xi’s focus has been on identifying and pre-empting security challenges rather than dealing with them once they arise. This explains Xi’s early determination to gain full control of both the military, by rooting out corruption while professionalising and reorganising the armed forces, and of the security and intelligence agencies, which are now in the third iteration of a rectification campaign designed to instil a strong sense of loyalty to the Party.

For investors, the shift of emphasis foreshadows a period of development in which China’s economic cycles are likely to become longer. 

Given the predominant position of the Party-state, China’s economic gyrations have been much more a function of policy than market forces. After its entry into the World Trade Organisation, its economic cycles became longer. Its integration into the global trading system at a continuously undervalued exchange rate allowed it to gain export market share fast, underpinning a period of strong structural growth. 

But the Global Financial Crisis spelled an abrupt end to China’s export-led growth model. Throwing money at unproductive investment since then, as we have argued since 2011, has resulted in the fast accumulation of debt and a structural growth slowdown. China’s cycles became shorter as the authorities repeatedly pump-primed the economy only to have to step back as the debt-fuelled stimulus created more inflation and asset bubbles than real growth. 

By 2017 Beijing had grasped that the economy needed supply-side change to boost productivity growth and arrest the alarming increase in overall indebtedness. But then Trump’s trade war kicked off, amid a groundswell of bipartisan hostility in the US towards China, and at the start of 2020 Covid-19 hit. 

These twin setbacks compelled the authorities to recalibrate their plans significantly, delaying the transition to lengthier economic cycles. But China embarked on myriad supply-side transformations in 2015 that have been accelerating. If these begin to bear fruit, it is likely that we will see longer periods of sustained growth. 

It is important to note, however, that the top leadership would be more than willing to endure protracted economic hardship to push through with these transformations and achieve its long-term goals of self-sufficiency and global dominance. 

If necessary, Xi would sacrifice economic growth not only on national security grounds but also for the sake of making China a more equitable society, as we have argued before. He would have no qualms about breaking the unwritten social contract between the Party and the people whereby the Party provides economic growth and the people don’t contest its legitimacy to rule. 

At present, a longer period of weak economic momentum is likely after the celebration of the Party’s centenary this July. 

The authorities are determined to deleverage the economy and derisk the financial system. The coronavirus has undone the gradual but good work of the previous couple of years in pursuit of these goals, while the various supply-side changes underway do not appear to have boosted productivity yet. And all the time, China’s economic policymakers have to grapple with a tougher international environment.

Moreover, the urgency to speed up the shift to a more self-sustaining growth model has pushed the Party to exert even more control over the economy. On our assessment, China achieved tremendous catch-up growth by allowing market forces to play a larger role and by changing the incentives driving individual and entrepreneurial behaviour. Top-down Party control has been a drawback, not an engine, for growth. 

Conclusion

China’s major political set piece takes on a special significance this year as it coincides with the Party’s centenary. The two sessions will not only outline the next five-year plan but also set out Xi’s vision for the next 15 years of his rule. 

Make no mistake: Xi Jinping is closer to Mao Zedong than he is to Deng Xiaoping. He is looking to national security and ideology, not growth and pragmatism, to realise his “China Dream” of national rejuvenation. 

This argues for longer economic cycles, as Beijing either succeeds in boosting productivity growth through supply-side change or is prepared to endure longer periods of economic hardship in pursuit of its long-term goals. On balance, it looks like China’s economy is about to embark on a prolonged downswing after the July celebrations. 

We shall be assessing the messages that emerge from the two sessions through this lens.