Jens Presthus, our lead China Analyst, shares his main takeaways from this year's National People's Congress. Expect a more assertive China on the global stage, but don't count on a 'pivot' on economic policy.
13 March 2023
Expect a more assertive China on the international stage
Speeches by both President Xi Jinping and Qin Gang, the new foreign minister, made it very clear that there never was a foreign policy pivot, and that there never was a “charm offensive” targeting Germany, France and the US (see previous newsletter). The idea of China being in a “prolonged war” with the US and its allies, and the need for China to improve its “operating environment” on the global stage, remains central to foreign policymaking. It will take time, but the ultimate goal is still to create a new world order in which Washington no longer is in a position where it can dictate what Chinese leaders and companies can and cannot do.
Xi mentioned the US and its allies by name when he talked about efforts to “suppress” China. This is noteworthy as Xi usually avoids directly referencing China’s adversaries. Qin also spoke warmly about the Sino-Russian relationship, blamed the US for the war in Ukraine and even said he hoped Europe had felt pain, learned from hardship and acknowledged the importance of strategic independence. In other words, to not let the US drive European policy on China. While Qin’s threats about conflict unless Washington changes its ways are alarming, they are not new. Chinese officials have made similar remarks in the past, often in the context of US engagement with Taiwan.
What perhaps has changed is the tone in which officials talk about China’s challenges on the world stage. Instead of “wolf warrior-ism” and hostile attacks on the US, Beijing is trying to position China as the victim of American aggression, pitching itself to the Global South as the responsible power that is opposing decoupling and is willing to engage even with the US – its ideological adversary. Li Qiang noted in his first press conference as premier that “encirclement and suppression are in no one’s interest.” – questioning the merits of decoupling.
Xi also presented a new 24-character phrase representing the essence of current Chinese foreign policy. Contrasting Deng Xiaoping’s 24-character phrase that included the famous “hide our capacities and bide our time” line, Xi’s new strategy wants party cadres to “be proactive and achieve things” and “dare to fight”. This follows previous calls by Xi to “better tell China’s story” and came at the same time as Qin noted that “China does not have enough microphones” on the world stage.
China brokering a resumption of diplomatic relations between Saudi Arabia and Iran is a great example of what we should expect more of going forward. In addition to how the deal helps address domestic considerations such as energy security and inflation, it also makes Beijing look particularly good from a “global leadership” perspective. Years of animosity and uneasy (partly as a result of US foreign policy) has tentatively come to an end. Of course, relations between Riyadh and Tehran may deteriorate again from here, but at least China has showed how it can put its new Global Security Initiative into practice. This in itself is a big win for a country that is trying to reshape the world order (see previous newsletter). ” That the deal was signed in Beijing is of course also of great symbolic importance – building on the narrative of “the east is rising and the west is declining”.
How China deals with Russia and the war in Ukraine going forward will likely also be based on the same approach. Despite tough rhetoric targeting the US and Qin’s warm words about Russia (and Xi’s rumoured meeting to Moscow next week), it seems unlikely that Beijing would want to step up its involvement in the war by providing arms to Moscow. The Chinese leadership has so far been very careful about not giving US lawmakers any excuses to impose more sanctions on China. Xi will likely continue to support President Vladimir Putin as much as he can to help him avoid a loss – he knows a weakened Russia (like another North Korea) or a Russia with a US-friendly leader would not benefit China. At the same time, he is wary of how additional US sanctions or export controls would put even more pressure on China’s economy.
On Taiwan, not much new was said. While this is partly because Beijing likely does not plan to take military action in the coming few years, it is also because it does not want to disrupt the current political environment in Taiwan that is starting to favour the “mainland friendly” KMT. However slim, any opportunity to achieve peaceful reunification will be seized on by the CPC.
A leadership team that knows how to get things done
It is big news that Xi formally has secured a third term as president, but the changes taking place below him are arguably more interesting and probably just as important.
One popular idea has been that Xi picking his own team could lead to groupthink and increase the risk of policy errors. There is probably some truth to this. But at the same time, the new team knows each other very well, which arguably is a good thing. Xi has for instance worked closely with He Lifeng, who is taking over Liu He’s economy and finance portfolio at the State Council, for decades. Li Qiang, the new premier, was Xi’s chief of staff when the president served as party secretary in Zhejiang province.
This has at least two important implications: First, the new team knows how to deal with Xi, and may be more inclined – at least compared to the old team – to speak up when they disagree with the president. Second, policymaking and implementation could be streamlined and made more efficient. This is because effective communication and a deep understanding of “what Xi wants” is essential in a system in which the leader sets out a broad vision and expects his or her team to act on it without detailed guidelines. Moreover, since Xi trusts his new team, he may be inclined to give them room to manoeuvre and make their own decisions.
Trust in key members of the “pre-NPC” team may also explain why there have been fewer leadership changes than expected. Both Yi Gang and Liu Kun, the PBoC governor and finance minister, will continue in their posts. While they may be replaced in the coming months, the decision to keep them underscores not just Beijing’s focus on financial and economic stability, but also that Xi trusts them to guide the ship in at least the near to medium-term.
Organisational changes underscore concern about technology development and financial stability
The changes that are taking place in the science and technology space are important as they indicate that Xi is not happy with progress made to date. They also mean that industrial policy will become even more active, and that the state (and the CPC) almost by default will play an increasingly interventionist role in the economy.
The ministry of science and technology will become leaner and focus its attention on formulating strategic plans, implementing reforms, and coordinating resources to drive technology innovation. In other words, it will take direct control over responsibilities that normally have belonged to the NDRC. A new central science and technology commission, likely to be chaired by Xi, will supervise the revamped ministry – underscoring its importance. It is also noteworthy that the heads of both the ministry of science and technology and the ministry of industry and information technology are seasoned industry professionals with real practical experience, even though they are not new to their positions.
The second major organisational change is taking place in China’s financial sector. A new national financial regulator is absorbing the CBIRC and will together with an elevated CSRC be responsible for supervising the conduct of financial services firms. The PBoC will in turn direct all its attention to ensuring financial stability. To make sure it succeeds in this task, the central bank will set up offices in every single province – up from today’s nine regional branches. Similarly, the new central regulatory body will have complete authority over local-level regulators.
The last point is important. Not only is China’s financial system and increasingly financialised economy exposed to external risks to financial stability, for instance from US sanctions and volatile global markets, but domestic risks are also growing. This is mainly happening at the local level and is a direct result of years of murky lending practices and unproductive investment that now are being exposed as economic growth is slowing and credit is getting harder to come by.
With local government revenue dropping fast, and many LGVFs being shut out of bond markets, local officials are turning to alternative ways of securing financing – including “strong-arming” politically weak rural banks. This is happening at the same time as depositors increasingly are being exposed to fraud involving the very same rural banks. With Beijing cognisant about the fact that the Chinese economy currently is going through a sharp structural slowdown, regulators are probably anticipating that risky behaviour will increase at the local level. Precautionary steps are therefore now being taken.
This erosion of local regulatory power is not an isolated event. Rather, it is part of a broader shift in which political and economic power is being moved towards the centre. For instance, through reform of the real estate sector, which is leading to a sharp drop in land sales revenue, Beijing is vastly reducing local government spending power. By extension, this means that Beijing is stripping local officials of political power, as they increasingly become reliant on the centre to fund public services and infrastructure projects. Going forward, local officials will increasingly have to choose between two options: ask for help from Beijing and/or sell trophy assets in real estate and infrastructure that often bring in lucrative and steady revenue streams. Few local governments want to choose the second option, but an increasing number will be forced to.
Premier Li plays down GDP growth, but seeks to appease entrepreneurs and foreign investors
Premier Li reiterated in his first press conference that Beijing is serious about structural reform of the economy, even if it means lower growth. For instance, he downplayed the importance of GDP growth for the sake of it, making it clear that Beijing does not plan to return to the days of high growth driven by debt-fuelled investment in infrastructure and real estate. Indeed, he did not mention the property sector once in his remarks – indicating that policymakers intend to push ahead with reform.
Moreover, while common prosperity was not mentioned explicitly, Li referred to how citizens mostly care about their general wellbeing and things like income, education and medical services. Expanding the scope of the “common prosperity trial” currently taking place in Zhejiang province will likely be a priority for policymakers in the years ahead.
More or less every CPC member promised to step up support for the private sector, including Premier Li during his closing press conference. But Xi and Li talking about “unwavering support” for entrepreneurs is not new. Moreover, what ultimately matters is what the CPC means by “unwavering support” and who will be on the receiving end of it.
Historically, as Desmond Shum (who has more experience than most in dealing with senior Chinese officials from a private sector perspective) points out, this has meant sectors and companies that are aligned with government priorities. In the current environment, this means that semiconductor manufacturers and producers of AI applications will have a much easier time getting bank loans and project approvals than companies in for instance the short-video platform space.
Furthermore, in addition to the “new system for mobilising resources” that was highlighted at the start of the NPC (see previous newsletter), Xi also called on private firms to be “more patriotic”. In other words, he is expecting companies to make sacrifices to serve the good of the nation, for instance by focusing their spending on technologies that “China needs”.
At the same time, while it is clear that the government will heavily influence activity in the private sector for some time, this is not necessarily something that will last forever. As Xi has noted in past writings, resource allocation in China’s economy should ultimately be market driven, it just needs to be guided by the government when external and internal conditions call for it.
The leadership’s focus on addressing concern among private sector entities – both domestic and foreign – should be seen in this context. With geopolitical tensions already making China a less attractive investment destination for many, Beijing knows it is more important than ever to convince foreign investors that at least conditions inside China will remain favourable to them in the long-term – even if there currently are changes to the regulatory and the broader economic model that might complicate the business environment in the short-term. Li, a native of Wenzhou in Zhejiang province, China’s cradle of private enterprise, was likely picked as premier in part to drive this message home.
About Global Counsel
Global Counsel is a strategic advisory business. We help companies and investors across a wide range of sectors anticipate the ways in which politics, regulation and public policymaking create both risk and opportunity – and to develop and implement strategies to meet these challenges. Our team has experience in politics and policymaking in national governments and international institutions backed with deep regional and local knowledge. Our offices in Brussels, London, Singapore, Washington DC, and Doha are supported by a global network of policymakers, businesses and analysts. Find out morehere.