US-China Watch

With the world in flux as never before, macroeconomic insight and analysis is always at risk of chasing a moving target. That is especially the case when it comes to the US-China conflict, driven by the oft unpredictable crosscurrents between the world’s two largest economies and their ambitious geostrategic aspirations. Through the combination of blogging and tracking the rapidly shifting news flow, the weekly updates below will attempt to keep you abreast of the latest developments on the US-China watch.

Don’t Be Fooled by China’s Third Plenum

In the so-called Third Plenum to be held on July 15-18, China’s senior leadership will have an opportunity to establish the broad outlines of a policy framework that could reshape the country’s course for the next several years. Don’t count on it. There is good reason to think that China watchers in the West have unrealistic expectations of what is to come.

Such was the case in late 2013 when the 18th Central Committee gathered for a Third Plenum of its own. That policy conclave was widely heralded as an historic opportunity for a new leader—Xi Jinping—to put China on a different path after the unfinished reforms of the Hu Jintao era. There was a palpable sense of excitement in the air, and at first blush, the plenum appeared to deliver. A final communiqué listed more than 300 reform proposals covering a broad range of areas—from state-owned enterprises, land policy, and foreign trade to investment reforms, and environmental and social welfare policies.

In the end, however, the Third Plenum of 2013 didn’t meet its lofty expectations. The implementation of reforms was disappointing and that plenum came up short on its biggest promise: to give the market a decisive role in guiding China’s economic development. Instead, Xi has presided over an increasingly state-dominated system. The intervening years have been shaped less by the successful execution of plenum-driven reforms, and more by the evolution of a leader-centric system of governance that quickly came to be known as Xi Jinping Thought.

This focus on governance followed a pattern established in earlier third plenums. The gathering in late 1978, for example, became a platform for the ascendancy of Deng Xiaoping and China’s pivotal moment of “reforms and opening up.” Similarly, the Third Plenum of 1993, under the leadership of Jiang Zemin, underscored the principles of the “socialist market economy.” Judging by these earlier outcomes, there is good reason to think the upcoming Third Plenum will produce statements that bear more on ideology and governance than on a detailed set of problem-specific actions.

Thus, many hints by Chinese officials ahead of the 2024 gathering could well be misleading. There is considerable hope and hype for new reforms to address some of China’s most serious problems, especially the property crisis and local-government indebtedness. At the same time, Xi and his leadership team have drawn attention to  “new productive forces” and the imperative to drive progress in frontier technologies and advanced manufacturing.

But these important challenges are unlikely to be resolved at the upcoming policy conclave. As before, the emphasis will likely be on governance, consistent with pre-announced goals, such as “building a high-level socialist market system” and “deepening the comprehensive reforms to advance Chinese modernization.”

Rather than dismiss such statements as slogans, we should take them at face value. Governance has been Xi’s primary focus ever since late 2012. What began in 2013 as a sweeping anti-corruption campaign quickly morphed into a comprehensive reworking of a leader-centric power structure. Not only has Xi published a four-volume series on Chinese governance, he has effectively taken over all aspects of the Party’s decision-making process.

Nor should Xi’s signature governance campaign be thought of in purely domestic terms. It is also being used to shape China’s great-power aspirations. Gone is the low-profile modesty of the Deng era, when China would supposedly “hide its strength and bide its time.” Instead, Xi is openly attempting to remake the international order through a three-pillar approach to global governance—framed around the Global Security Initiative, the Global Development Initiative, and the Global Civilization Initiative. In effect, he is doubling down on the aspirational commitments he made when he first espoused the Chinese Dream in late 2012. Xi believes that without further advances in governance, China’s emergence as a great socialist power will be stymied.

In one key respect, this is a disappointing conclusion. Westerners have long had a hard time understanding and accepting China’s emphasis on governance. That’s because we tend to be more solutions-oriented in tackling specific problems. We see the upcoming Third Plenum as an opportunity for China’s leaders to embrace a new strategy to fix a struggling economy. Governance, especially an approach steeped in the interplay between socialist ideology and a consolidation of power featuring “Xi Jinping at the core,” is not the answer we are looking for. But as the late historian Jonathan Spence always emphasized, our answer is often not China’s answer.

Yes, China has plenty of issues on its plate. In addition to the property crisis and local-government debt problems, it also must cope with containment pressures from the United States and its allies. And then there is my personal favorite: the imperative for a consumer-led structural rebalancing of the Chinese economy. This can happen only with long overdue social safety-net reforms of health care, retirement, and the hukou system of household registration (which undermines internal migration). All are essential if China is going to redirect the excesses of fear-driven precautionary saving toward fueling a more robust consumer society.

But that’s my Third Plenum agenda, not China’s. Most China watchers are fixating on the problem-specific detail of what is likely to be included in another lengthy concluding communiqué. But don’t be fooled. Experience shows that the Chinese leadership tends to overpromise. China’s third plenums have long been about governance, and this one is unlikely to be different. For Xi Jinping, consolidating power through a revolution in Chinese governance remains the highest priority, and it is still very much a work in progress.

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