WPR Column China Lack of Will Isn’t What’s Keeping Xi From Reforming China’s Economy Mary Gallagher Jul 23, 2024July 23, 2024

 WPR

Column  China

Lack of Will Isn’t What’s Keeping Xi From Reforming China’s Economy

Mary Gallagher

Jul 23, 2024July 23, 2024

Chinese President Xi Jinping delivers a speech at a dinner marking the 74th anniversary of the founding of the People’s Republic of China, in Beijing, China, Sept. 28, 2023 (AP photo by Andy Wong).

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As expected, the Chinese Communist Party’s Third Plenum meeting last week was disappointing for anyone expecting detailed plans or exact policy prescriptions for reorienting China’s flagging economy. The initial communique, the subsequent resolution, and even President Xi Jinping’s speech at the gathering revealed no new grand strategy to build domestic confidence and restore foreign investors’ interest and enthusiasm.

But even if they are short on details, Third Plenums—as the third meeting of the Chinese Communist Party’s sitting Central Committee are known—can unveil the party’s view of the direction ahead. As such, last week’s meeting offered Xi an opportunity to signal a new vision for the future. Instead, its outcome bore a remarkable similarity to that of the 2013 third Plenum, at which Xi unveiled his economic strategy for the first time as the party’s general secretary.

Put simply, Xi’s ambition has been and still is “economic structural reform”: to remake the Chinese economy so that it is more efficient, more coordinated across regions, less polarizing between the haves and the have nots, and more effectively regulated by an authoritative government in Beijing.

But the similarities between the plenums of 2013 and 2024 indicate that Xi has not been very successful in achieving his goals of building national markets, breaking down provincial barriers and allowing people to move freely to find work and be treated as citizens equally across the country.

While many observers, including myself, have written about Xi’s ideological reluctance to expand China’s shallow welfare state or boost private investment, it is more important to understand the political constraints to Xi’s reformist gambit. Why is it so hard for China’s most powerful leader since Mao Zedong to achieve his vision of remaking China’s economy?

The most important political constraint Xi faces in achieving reforms has been opposition to them from “vested interests.” Now, according to the opening paragraphs of the 2024 plenum’s resolution, Xi and the Central Committee have “with great historical initiative, tremendous political courage, and a strong sense of mission, united and led the entire Party, the military, and Chinese people of all ethnic groups in … breaking down the barriers erected by vested interests.”

Unfortunately for Xi, the idea that vested interests have been vanquished is wishful thinking. While he is not openly challenged, he faces significant latent resistance from these groups, which include local officials, managers and workers in the state-owned business sector, and even urban residents.

These insiders have overwhelmingly benefited from China’s old development model, which relied on decentralized competition between regions for economic growth and investment. Many local officials amassed massive wealth by growing their local economies, developing the property sector and attracting investors. The state-owned business sector has maintained its critical importance at the “commanding heights” of the economy. State-owned enterprises enjoy monopoly benefits in key sectors at home, while abroad they have been tasked with China’s drive to build infrastructure and trading links to the rest of the world. And urban residents have enjoyed rising incomes and expanding wealth during the reform period, due to much better employment opportunities, education and social welfare compared to rural farmers and migrant workers who exist on the margins of China’s megacities. All of these groups are now reluctant to give up their special positions.

Xi’s consolidation of power has given him more authority to crack down on outsiders. Far harder has been finding ways to implement his vision for China’s economy that also motivates insiders to work toward those same goals.

Xi’s consolidation of power has given him and the party more authority to suppress dissidents, throw religious minorities into reeducation camps and gut political liberties in Hong Kong. But cracking down on these outsiders is easy. Far harder for Xi has been finding ways to implement his vision for China’s economy that also motivates insiders to work toward those same goals. The crux of the problem, and the reason the goals of this latest plenum resemble those of Xi’s first plenum 11 years ago, is exactly that: how to motivate those who have benefited from the old development model to change their behavior when Xi’s vision threatens to curtail their autonomy and take away the special perks of their insider status.

Xi wants to regulate and discipline local officials and state enterprises using both a stronger legal system and the market to reduce corruption, malfeasance and unnecessary interference. He wants to equalize treatment between rural and urban citizens so that migrant workers can more easily enjoy the benefits of urban life. While these goals are laudatory and necessary, they threaten the benefits that have long been enjoyed by insiders.

Xi has at times tried to take a populist turn toward rural citizens and migrant workers, such as the 2021 campaign to push “common prosperity.” But this scared off investment and cast a pall over China’s technology sector in a way that was counterproductive. Xi is also unlikely to use bottom-up mobilization of workers and civil society to enact change because this will exacerbate internal social conflicts and threaten social stability.  As for cultivating new social interests that support his vision for China’s economy, he has ultimately been unsuccessful in doing so.

A final conundrum for Xi is that China’s current manufacturing success in new energy sectors, such as electric vehicles and solar panels, are products of the old system. Local governments used industrial policy, subsidies and close state-business ties to build capacity in these new sectors. Competition between different local champions drove down prices and improved quality, while the central government provided incentives to shift consumption toward these sectors. This model has its problems, including overcapacity and excessive competition, as well as environmental degradation and lax regulation. But it is also China’s tried and true method for economic dominance globally. Why fix something that isn’t completely broken?

The 2024 plenum’s resolution contains glimmers of proposed changes that, if realized, will begin to move China’s economy in the direction articulated by Xi. It notes the need to allow local governments greater latitude to collect revenue and for the central government to take on greater responsibility for spending. This would help stabilize local government finances and place a greater burden on the central government to fund the expansion of social welfare. Other goals in the resolution, such as equalization of treatment between rural and urban residents and equal rights for migrant workers in cities, are only possible once these changes to central-local relations have been instituted and the central government takes on a much greater role in redistribution.

However, these glimmers of change were already present in the 2013 document as well. Eleven years later, the vision hasn’t changed but implementation has lagged. The conclusion is therefore inescapable: Xi is not shackled by ideological constraints; he is thwarted by politics.

Mary Gallagher is the Marilyn Keough Dean of the Keough School of Global Affairs at the University of Notre Dame.