Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.
This is a big week in China. On Monday, the Communist Party’s elite Central Committee convened for a four-day plenum in Beijing to outline the country’s next Five-Year Plan, the fourteenth since Mao Zedong launched the first in the early 1950s.
Once the backbone of a Soviet-style command economy, these blueprints now serve a broader purpose. They are statements of political and economic intent that signal Beijing’s priorities for everything from industrial strategy to national security. In a world of technological rivalry, trade disputes and geopolitical tensions, their implications reach far beyond China’s borders.
The mood inside the vast Soviet-era hotel that traditionally hosts the gathering is unlikely to be celebratory. China’s economy is flagging. The new plan, expected to be formally adopted next March, will not sugarcoat the challenges ahead.
Data released this week confirms the slowdown. The economy grew at its weakest pace in a year during the third quarter. A grinding property slump and an unresolved trade war with the US have sapped consumer confidence and momentum. Despite a raft of government support measures, from mortgage-rate cuts to looser credit, prices for new homes in 70 major cities fell by 0.41%, its sharpest monthly drop in almost a year. Property investment has plunged nearly 14% over the past 12 months alone.
Deflation, once unthinkable in a country which was synonymous with breakneck growth, has become endemic. Consumer prices fell by a further 0.3% last month. Factories are producing more than shoppers will buy; consumers delay purchases in expectation of lower prices; wages fall as profits evaporate.
As the Party apparatchiks gather this week, one question will haunt them over their Moutai, and it is fittingly the same as that which pre-occupied Vladimir Lenin during his Munich exile in 1902: What is to be Done?
Self-reliance through technology
It is likely that the officials will respond with a trifecta. First, for Xi and his comrades, the answer begins with technology. During the 14th five-year plan that ends this year, China’s industrial policies and subsidies delivered breakthroughs in green technologies, such as electric vehicles, that have threatened core industries in Europe and the US and sparked trade tensions.
Expect more of the same. The next plan is likely to double down on what Xi has labelled “self-reliance and self-strengthening” in science and technology. The state will continue to pour vast resources into strategic sectors such as artificial intelligence, quantum computing and biotechnology. The aim is not merely to outcompete Western firms, but to insulate China from them altogether.
“The pursuit of greater self-reliance and strength in science and technology is indispensable for securing critical technological advantages,” declared the Communist Party mouthpiece People’s Daily this summer. Industrial policy, long derided in the West as inefficient and outdated, has been reimagined as a weapon of economic resilience and self-reliance.
The elusive consumer
Yet technology alone cannot rescue growth. The more structural challenge is tepid domestic demand. China’s consumers, unlike their free-spending American counterparts, remain remarkably cautious. The pandemic’s rolling lockdowns scarred household confidence, while the property slump has destroyed a key source of perceived wealth.
For all its industrial might, China’s economy is largely made up of citizens who prefer to save rather than spend. Household consumption accounts for just 40% of GDP, compared with 68% in the United States.
Policymakers know this imbalance cannot endure forever if China wants to break through the dreaded “middle income trap” and become a developed economy. The government has already introduced subsidies for families with children and incentives for consumer loans, hoping to coax families into opening their wallets. The next Five-Year Plan might attempt something more systematic.
“The government may consider setting an explicit official target for the consumption share of GDP,” says Ning Zhang, senior China economist at UBS. A goal to raise that share by even five percentage points, he argues, would demonstrate serious intent to rebalance the economy.
A consumption revival would also reshape global trade patterns. Exporters from countries increasingly aligned with Beijing, and cut out of the US market, stand to benefit. South Africa’s wine and fruit producers, along with suppliers of raw materials, could find a growing source of demand in the East.
But habits formed over decades are hard to change. Chinese households are, as one economist quipped, “the world’s most disciplined savers”. Convincing them that the future will be safe enough to be able to spend today is a psychological and cultural challenge as much as an economic one.
Security above all
Finally, and perhaps the most consequential for the rest of the world, is security. In Xi’s strategic vision the concept has many forms — military, technological, and economic — but they are all increasingly intertwined.
That was clear last month when Xi, flanked by Vladimir Putin, inspected an extraordinary array of new missiles, drones and hypersonic weapons at a military parade in Beijing. The vast spectacle was intended not only to stir nationalism at home, but also remind foreign observers that China is “war ready”.
But economic security is equally critical. The new plan will probably expand efforts to “de-risk” supply chains, reduce dependence on foreign technologies and safeguard control over strategic resources. According to Neil Thomas of the Center for China Analysis, Beijing’s world view has “darkened” amid intensifying American hostility.
“Boosting productivity is Xi’s best hope of advancing his project of national rejuvenation amid demographic decline, slowing growth and potential technological isolation from the West,” Thomas writes in a report .
A key element of this strategy is maintaining China’s vice-like grip on rare earth minerals, a set of 17 elements essential for everything from electric vehicles and wind turbines to smartphon
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