As China abandons strong growth, the world must adapt – The diplomat
When top officials in the Biden administration gathered for their first face-to-face meeting with their Chinese counterparts in Alaska in March, they were surprised. Yang Jiechi, China’s top diplomat, broke with diplomatic protocol by giving the floor to Secretary of State Antony Blinken and National Security Advisor Jake Sullivan for 15 minutes without translation. The two sides continued to speak behind closed doors, but dressing up the audience will not help ease tensions, including de-escalation of the tariff war and technological restrictions.
Alaska has been the latest manifestation of Chinese President Xi Jinping’s elevation of China’s political and geopolitical considerations over traditional economic concerns, especially by maintaining high growth rates. This theme is present throughout China’s recently released 14th Five-Year Plan, in which national security issues permeate discussions of traditional economic spheres. This transition has been going on for some time, but it is now becoming much more formal and explicit. Xi announced that this year – the 100th anniversary of the founding of the Chinese Communist Party – marks a “new stage of development” in which the focus shifts from “getting rich” to “getting strong.”
This is a transition to which the rest of the world – policy makers, businesses and investors – will have to adapt. Traditional ways of understanding Beijing’s hierarchy of priorities – especially the balance between economic growth and other goals – are changing. Significant changes in the way Beijing defines China’s economic growth targets illustrate the challenges and the need to develop new tools. This change requires developing better ways of reading tea leaf politics in Beijing, lest Chinese observers be caught off guard by unexpected economic or geopolitical decisions.
This year’s five-year plan is the first not to set a target for average annual growth in advance, as Xi pushes officials to focus less on the speed of growth and more on its quality: protecting the environment. , reducing financial risks and realizing technological aspirations – in particular, strengthening self-reliance in critical technologies at the center of Sino-US technology competition, including advanced semiconductor, software and manufacturing.
For 2021, Beijing has set an annual growth target, but has made it a very unambitious level of “above 6%”. Because of the base effects from 2020, when the pandemic slowed China’s growth to 2.3%, achieving that goal requires virtually no economic expansion from China during the year. The message to local officials is clear: flexibility should motivate them to “devote all their energy to promoting high quality reform, innovation and development”.
The dilemma for those who follow China’s growth policies is that if Beijing moves away from rigid targets, it does not give up its ubiquitous intervention in the economy. China’s leaders are balancing two main tasks of the economy at all times: maintaining growth high enough to avoid rising unemployment and discontent, but not over-stimulating the economy and increasing the risk of debt or bubbles speculative in real estate or stocks. Beijing is using the media to explain to the rest of the system – including the vast Chinese bureaucracy – how it must maintain this balance at any given time.
There are still no criteria for mapping Beijing’s “reaction function” to these policies as one might follow the Federal Reserve. Official data on unemployment in China, for example, gives a biased picture of labor markets – a very sensitive subject for policymakers, given the risks of social instability – and does not yet serve as a benchmark for policies. The growing importance of mentions of working conditions is a better signal that leaders are prioritizing these issues and want local authorities and regulators to do so as well.
How do you navigate a world in which growth goals and other traditional anchors of Chinese politics are losing importance, but politics is still in the driver’s seat? One solution is to take a closer and rigorous look at the megaphone Beijing uses to communicate its political views – the Chinese media.
Research by Eurasia Group, Hala Systems and a political scientist from Columbia University found that there is a strong association between political decisions and the views previously expressed about the economy by political leaders in Chinese media. It is the basis of an index created to evaluate the signals that management sends to the rest of the system and how those signals are interpreted and played back. A high level of the index indicates that Beijing is signaling satisfaction with current growth levels and a willingness to reverse or even tighten its policy.
A long-term view of the index illustrates how Xi’s tolerance for lower growth, formalized in the last five-year plan, has been underway for several years. Compare the 2015 period, which saw weak growth, Beijing’s dissatisfaction with China’s economic performance (reflected in the low sentiment index reading) and aggressive stimulus measures, with 2018- 2019, when growth slipped to a decades-long low just to spark moderate concern and a stimulus from Beijing.
What does the Beijing Intentions Index suggest now? The index peaked in February as Beijing was full of confidence after posting 6.5% growth in the fourth quarter of last year, better than any major economy. Since then, the index has remained positive but has rebounded against mixed economic data. Officials are generally comfortable with the conditions, but are reluctant to act too quickly to withdraw the stimulus given uncertainties about the strength of the rebound.
This translates into fine-tuning of macroeconomic policy, particularly monetary policy, but a willingness to continue with a wave of recent measures to contain financial and economic risks. These actions include tightening restrictions in the real estate sector, renewed control of shadow banking products such as trusts and a continued crackdown on major fintech companies, which tricked Jack Ma’s Ant group and led to the cancellation. the successful IPO of the company.
If economic activity or confidence falls too far for comfort, Beijing will fall back into support mode – a shift that would result in signals from the Chinese leadership to the rest of the political system through the media, and a corresponding drop in sentiment. index.
Sentiment analysis probably also has a lot to offer as a tool for understanding the evolving geopolitical considerations of Beijing. For example, a study by Kacie Miura, a political scientist at the University of San Diego, examined China’s foreign policy dispute with South Korea in 2017 and found that provincial officials in China were more likely to report harsh rhetoric against business South Koreans in their local media – and to fight back against them on the ground – if their cities were not economically dependent on these companies. This type of red flag will become increasingly important to companies exporting or operating in China as Beijing embraces economic coercion as a foreign policy tool – as highlighted by the ongoing trade war with Australia.
The bottom line is that in the highly politicized, top-down governance environment that Xi has created, policies are becoming more dynamic and less grounded in traditional norms. It is therefore imperative to correctly interpret the signals coming from Beijing to the rest of the system and to respond in real time. One of the biggest priorities will be when China’s leaders are comfortable enough with growth to elevate other priorities, from tackling pollution to confronting Washington.