abrdn: an inwardly focused China is a less efficient model of economic growth

October 19, 2022

Robert Gilhooly, Senior Emerging Markets Research Economist bij abrdn, geeft zijn commentaar op het vijfjaarlijkse congres van de Chinese Communistische Partij dat deze week wordt gehouden.

The juxtaposition of UK politics and Chinese politics is particularly striking at the moment. Yes, democracies can be noisy affairs, but the heightened political turmoil in the UK is the polar opposite of the exceptionally tightly managed political theatre presented to the world at China's Party Congress.

To paraphrase everyone's favourite late '90s band: there ain't no party like a Chinese Communist Party party, and we should remember that this really is a CCP showcase event, rather than necessarily one which reveals concrete proposals or sudden changes in direction.

That said, one of the most notable outcomes of the Party Congress is the large degree of continuity implied by the work report. This year Xi's speech provided a summary of the main report, rather than the whole thing, cutting his speech down by half, albeit to a still lengthy 1-hour 40 mins.

So what have we learnt?

First, some commentators have taken comfort from growth and development aims being re-affirmed as a top priority: President Xi reiterated that ‘the principal contradiction facing Chinese society is that between unbalanced and inadequate development, and the people's ever-growing needs for a better life’, and that the country should still aim ‘to basically achieve socialist modernization by 2035’.

But given still low GDP per capita, the implied hard and soft power that comes with overtaking the US - which could happen around 2035 - we don't really find this particularly reassuring. 

President Xi’s speech also leaned towards greater self-sufficiency and security considerations: a more resilient, inwardly focused China is also likely a less efficient model of economic growth. The need to ‘be prepared for the worst-case scenarios… and even dangerous storms’ suggests that de-risking - or more generally risk minimisation, which could include against geopolitical tensions - is likely to weigh on the economy, even if this should help reduce tail risks in the medium to long-run.

Relatedly, the blurring between technology and national security, also adds to less efficient statist tendencies for policy making. This may be necessary given the US has turned the screws on the access and ability to develop the most advanced semiconductors necessary for cutting edge technology such as AI and supercomputing.

China has already spent billions on attempts to create domestic capacity in the most advanced semiconductors - and the US move could cause them to spend much more, potentially risking capital misallocation if not successful. Given Xi's pledge to ‘win the battle in key core technologies’, this implies this effort will likely double-down. In the long-run, this could be bad for global economic efficiency, to the extent that this causes a technological fragmentation.

Given the focus on the long-run at Party Congresses, hints on policy pivots are generally minimal. The need to ensure housing supply through ‘multiple channels’ and a desire to improve the rental market are interesting points to watch. It could potentially imply a greater role of the state in providing social housing.

Finally, the People’s Daily and other state media had emphasised the importance of sticking with ‘Zero Covid’ ahead of the Congress, thereby downplaying the chances of an exit strategy being revealed. Indeed, given the recent slowdown in the pace of booster roll out for the over 60s, combined with Xi’s emphasis on improving the emergency response mechanism for healthcare at the Congress, an exit strategy – let alone an exit – is likely to remain elusive.