President Xi gambles it all on ‘innovation fixation’

A fixation on innovation will drive China’s industrial policy in the next five years, despite an economy in crisis. President Xi Jinping will cast aside growth targets and double down on what has now become a “security project” in a fractured world.

As the ruling Communist Party elite discuss the next five-year plan in Beijing this week, technological supremacy will top the agenda. Neither economic stagnation at home nor rising unemployment will get in the way of Xi’s obsession with “turbocharged” self-reliance.

“The central message this time is continuity. Xi is not rewriting his playbook – he is doubling down. Expect more state-guided innovation, more money for frontier tech, and more support to keep the industrial machine humming,” academic Neil Thomas said.

“That may surprise those who assumed slowing growth, weak consumption, and a wobbling property sector might eventually force Beijing into significant stimulus,” Thomas, at the Asia Society Policy Institute’s Center for China Analysis, added.

“Not so. The bias is clear: industry first, households second,” he wrote last week in an analysis for The Intrepeter, which is published by the Lowy Institute think tank in Sydney.

Reforms to rebalance the economy … are on the table, just not on top.

Neil Thomas, Asia society policy institute’s center for china analysis

Data points:

• The world’s second-largest economy is creaking, with official third-quarter GDP growth coming in at 4.8%. Yet the true figure is probably less than half of that. 
• Today’s National Bureau of Statistics’ numbers illustrate China’s reliance on manufacturing and exports, stoking concerns about economic structural imbalances.

Delve deeper: In short, the country is suffering a severe dose of shrivelitis. Factory activity shrank for a sixth straight month in September, while deflation is now a major problem, as stagnant wages squeeze domestic demand following the property meltdown in 2020. 

Between the lines: “The weakness in investment spending reflects a lack of confidence in the economy’s growth prospects, as well as in government policies that could support growth,” Eswar Prasad, a professor of economics at Cornell University, said in an email.

Big picture: Still, this is unlikely to change in the near future due to opaque policies being rubber-stamped behind closed doors at the fourth plenum this week. Up to 370 senior Party officials of China’s central committee will give a veneer of consensus to Xi’s plan.

Bottom line: “What about reforms to rebalance the economy? They are on the table, just not on top. Without the security rationale that drives industrial policy, structural reforms will lag,” Thomas, at the Asia Society Policy Institute’s Center for China Analysis, warned.

China Factor comment: At the core of Xi’s argument is what he sees as an “indefinite era of confrontation and uncertainty,” fueled by global trade wars, American tariffs, and sanctions. Improving the lives of ordinary Chinese people is unlikely to become a priority.