China’s New Plan for its Economy? Same as the Old Plan

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Details remain scarce, but indications are that Xi Jinping and Co., will aim to prioritize "new productive forces." That could mean a lot for U.S. factories, especially in emerging industries.

Chinese Communist Party (CCP) officials wrapped up a major meeting in Beijing on Thursday that is expected to create an economic roadmap designed to jumpstart the sluggish Chinese economy.

If early reports are any indication, that roadmap will look familiar.

The New York Times reported that the official post-meeting summary released following the conclusion of the "Third Plenum of the Central Committee" seemed to carry a message straight from Chinese Leader Xi Jinping himself, urging China to "stick with his state-led, tech-focused strategy, only do it better. That is, make it cleaner, more fair and keep a careful eye on national security."

Bloomberg has more:

While it's a high-level statement that's lacking in specifics, more will be revealed over the coming days in a detailed report and sundry policy announcements.

Xi's favorite new phrase - "new productive forces" - will likely feature prominently. It's a twist on an old Marxist concept, and involves a greater use of state power to accelerate the development of everything from nuclear technology to electric vehicle manufacturing.

High-quality growth is also a key focus. Officials want to move the economy from a reliance on property and big-bang infrastructure projects to more sophisticated and strategic sectors like artificial intelligence and computer chips.

This thinking is one reason why Xi has been reluctant to deploy massive state construction projects to juice disappointing post-pandemic economic growth. It's also why authorities haven't acted more aggressively to stem a downturn in real estate.

That "new productive forces" phrase is important, as it appears to be at the heart of Xi's economic vision, at least for the time being. In an opinion piece for Brookings, Arthur Kroeber explained that "new productive forces" is a bit of a shift for the Chinese economy, moving it toward a "technology-centric, industrial policy-driven growth strategy" that aims not just to "achieve mastery in established technologies" but to be an innovator, utilizing national resources via "centralized control over capital allocation."

The problem with that strategy, critics argue, is that it places too much emphasis on state-led development. China's current economic problems are vast, ranging from a major housing crisis to local government debt to sluggish consumer spending to trade tensions around the world, especially with the United States. If China wants to strengthen its economy, the critics say, it needs to open up a bit.

But the events of this week signal that ain't happening, and we shouldn't dismiss the gameplan. Xi's strategy may just work. Kroeber writes:

For one thing, China's much-discussed dominance of renewable-energy technologies such as solar, wind, batteries, and electric vehicles is the result of a similar, but much less systematic, industrial policy effort. This success is not isolated. China now accounts for about 20% of the world's manufactured exports and about 30% of global manufacturing production value; these shares so far have proved resistant to trade "decoupling" efforts led by the United States.

This strong and diverse manufacturing ecosystem, combined with a large and technically skilled workforce, means that more systematic government-led efforts in coordination and basic research are likely to prove fruitful. But China will remain heavily intertwined with the rest of the world economy, both because it will depend on external markets to absorb its inevitable production surpluses, and because even an economy as large as China's has no hope of completely localizing the intricate supply chains for high-tech goods.

Emphasis ours on that bolding in the quote. Because while Xi and his team may be prepping to lead the way in new technologies - solar, wind, batteries, EVs, and things we may not even have thought of yet - the success of the "new productive forces" strategy hinges on flooding the global market with Chinese goods, which actually isn't new at all. China has been doing just that for the past two decades, and it led to the "China Shock" that decimated U.S. industrial communities, causing tens of thousands of factory closures and millions of lost jobs.

The United States is finally waking up to this, issuing steep tariffs on Chinese goods in strategic industries and placing export controls on technology deemed essential to national security. That U.S. response is likely driving some of the current Chinese policy. While China may be able to get around some of the export controls, Xi knows it's not guaranteed that China will have access to the things it needs. China will have to invent things.

But make no mistake - China is likely to do everything possible to continue to get its products into the U.S. consumer market, which remains the biggest in the world. It's already abundantly clear China is dodging tariffs by transshipping products through countries like Mexico and Vietnam, for example. Even if China becomes the world's innovative leader, its economy will remain dependent on successfully shipping its inventions around the globe, at least under the current plan.

While China hasn't yet released the exact details of the Third Plenum, we know enough already to figure out Xi's vision for the next few years. Now the United States needs to shore up its own strategy. Part of this must include continuing to make strategic investments like those in industrial policies like the Inflation Reduction Act, Bipartisan Infrastructure Law, and CHIPS and Science Act, all of which have spurred nearly $900 billion in investments in domestic production since 2021. The United States needs to be able to make the things we need, period.

But the U.S. also must implement a modern trade enforcement plan to counter China's continued unfair trade practices. We outlined many of the policies we think would be most beneficial in our recent SHOCKWAVES report, including modernizing trade tools; reinstating "Section 421" import surge protection; further utilizing enforcement mechanisms like tariffs; working alongside allies; and enforcing domestic content preferences.

While the specific details about the Third Plenum have yet to be unveiled, we know enough about the overall strategy to figure out where China is headed. The only question now is how the U.S. will respond.

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