Tuuli Koivu

28-10-2022 09:56

Is Xi making the right decisions for China?

Chief Economist Tuuli Koivu

At China’s Party Congress in October, Xi Jinping continued to strengthen his role as China’s leader, as was widely expected. His position is now much stronger than the one held by his predecessors, as nominations to the Communist Party’s high-level positions were dominated by Xi’s allies and not a single obvious successor candidate for Xi was nominated. What's more, recent changes to the Party’s constitution indicate that the leader’s role will be extremely strong.

This is a significant turn for China, which used to have a well-established system for transferring power every ten years to a new group of leaders. Even the Party's highest decision-making body – the Politburo Standing Committee – was previously not dominated by a single person but had many different fractions of the party represented, and a balance of power did exist.

However, it is not clear what this change implies for the Chinese economy.

Worried about the direction

Based on the experience of Xi’s first ten years in power, we are of course worried about the direction of China’s economic policy. Although Xi continued to repeat at the Party Congress that the economy continues to be China’s top priority, we very well know that that is not the case anymore. The most recent example is the tight COVID policy, from which China does not seem to be actively looking for an exit but which keeps China’s short-term outlook weak. The same order of priority existed in Xi’s speech, where words linked to security and self-sufficiency carried a lot more weight than words related to reforms and markets.  

Somewhat paradoxically, while emphasising the role of the Party and increasing control over the economy, Xi Jinping also continues to be a very ambitious leader. He wants to see China experience a grand rejuvenation and be on top of the world by 2049. A prerequisite for reaching that target is robust economic growth. 

Thus, we expect Xi to continue solve the problems that may hinder China’s future growth. Those problems stem from weak demographic trends, high levels of debt, dependence on western technology, both domestic and global environmental challenges and weak income development among low-income households. In the recent years, China has tried to solve these problems under Xi’s leadership. However, the solution offered by Xi for most problems has been to increase control and regulation over the economy rather than introducing more market mechanisms, as previous leaders used to do.

We are afraid that the same trend will continue and Beijing will continue to increase its role in economic decision making. For each company operating in China, this implies that one has to follow Xi’s policy lines very carefully and be ready for even rapid changes in the business environment. In addition, for each actor, it is important to be in that group trying to solve the problems above rather than be in a business making challenges more severe from China’s long-term prospect.

A weaker growth path

It is of course also critical that Xi is making the right decisions for China’s economy. The risk that decisions are not based on the right information and thus end up being wrong clearly increases along with Xi’s growing power. In addition, when there are no more breaks in the decision-making bodies and opposition to Xi’s policies, even wrong decisions can be implemented very quickly, setting China on a much weaker growth path than was generally expected a few years ago.

We did not use to worry that much about the possible negative effects of China’s one-party system on economic growth: People felt Beijing was far away and business was rather independent from political decision making. However, China’s current political direction certainly increases the risk that economy cannot be separated from politics anymore. We will become especially worried over China’s future development if regulation and political direction start to shake Chinese people’s plans for a better future and their willingness to work hard, educate their kids and become entrepreneurs. Breaking that strong foundation for China’s growth would imply that one should be prepared for much more negative scenarios for China.

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