The Chinese Communist Party (CCP) has just concluded the Third Plenary Session of its 20th Central Committee, emphasizing continued reform and opening up.
Phrases like “reform will not pause, and opening up will not stop,” and “the market plays a decisive role in resource allocation,” suggest a commitment to these principles. However, Xi Jinping’s definition of reform diverges significantly from the Western interpretation rooted in Deng Xiaoping’s era, which leaned towards a market economy and some political liberalization.
Under Xi, the term “reform” has been redefined. Xi has clarified that moving towards Western “universal values” and political systems is a misinterpretation. The Third Plenary Session reaffirmed that reforms must maintain the CCP’s leadership, adherence to Marxism, socialism with Chinese characteristics and the people’s democratic dictatorship.
This version of reform, according to Xi, “will neither take the old closed and rigid path nor the erroneous path of changing flags and altering banners.”
Under this premise, the party must constantly “reform,” or in other words, adapt to the times, adjusting policies for governing the country and managing the economy to best serve the ultimate goal of maintaining and strengthening party rule.
Reform is not an adjustment made for special circumstances or in a specific direction but a routine action for governing the country. In fact, the “reform” that the CCP discusses in the economic sphere today is another way of saying “planned economy” at the highest level.
That said, Xi Jinping’s planned economy is different from Mao Zedong’s. Mao’s planned economy had no “opening up” and no market mechanism. In Xi Jinping’s planned economy, opening up and a partial market economy are allowed, provided that they need to be under the supervision and control of the party.
In “An Inquiry into the Nature and Causes of the Wealth of Nations,” Adam Smith coined the term “invisible hand” to describe the unseen forces that move the free market economy. That hand in China’s controlled market economy is the Communist Party, and it is visible, although it has started showing signs of dysfunction recently.
Developments in China’s economic landscape suggest that the Chinese economy may be slipping out of Xi Jinping’s control. After unsuccessful attempts to revive the economy, the signs are that Xi is pivoting towards a deeper planned economy to solve these problems.
On June 3, the State Council prohibited central government-owned enterprises in non-financial sectors from holding shares in financial institutions to mitigate financial risks. This “withdrawal from financial sector order” signals anticipated financial turmoil.
In July, the Chinese central bank, the People’s Bank of China (PBOC), began borrowing national bonds and planned on selling them in the secondary market. While this action can increase bond yields and stabilize the RMB exchange rate, it can also have severe consequences.
The Ministry of Finance, which issues bonds, and the central bank, which prints money, are controlled by the CCP. This allows the Ministry of Finance to issue unlimited bonds. If it can’t repay them upon maturity, the central bank will print more money. The central bank’s borrowing of national bonds will also lead to unanchored money printing, causing significant inflation.
Two weeks later, the PBOC unexpectedly lowered interest rates again to further increase liquidity, despite inflation risks. These moves reflect China’s dire financial situation: a severe lack of liquidity and nobody has money. Similar issues are evident in other economic areas under Xi’s administration, as significant stimulus efforts in electric vehicles (EVs), real estate, and the stock market in the first half of the year have all been ineffective.
China’s EV sector, a key focus for Xi, faces setbacks with high U.S. and European Union tariffs, limiting market access. The Chinese stock market remains unstable. The government has used measures such as reducing the stamp duty and investing significant funds to prop up the stock market.
While the index briefly rose above 3,000 points, it primarily benefited state-owned enterprises. Private small and medium-sized enterprises continued to decline. The real estate market is in a slump, with developers and consumers refusing to invest due to China’s gloomy economic future, financial difficulties and population decline.
Overall, Xi Jinping’s economic rescue attempts have failed. In response, he appears to be shifting towards a deeper planned economy to address these issues and mitigate the CCP’s authority crisis.
This is exemplified by the new Law of the People’s Republic of China on Rural Collective Economic Organizations. This law reaffirms that all rural land belongs to the country and that the use and management rights of land and other rural resources are centralized under party organizations at various levels. This reverses the rural reforms in the late 1970s, which rendered the farmers great autonomy in managing lands and receiving profits accordingly.
This Third Plenary Session also pledged to strengthen, optimize and expand state-owned capital and enterprises — another indication of a shift towards deeper planning in economic matters. Transitioning to a deeper planned economy aims to consolidate CCP rule and will impact foreign policy, especially regarding Taiwan. The dire economic situation may limit China’s ability to take Taiwan.
However, if Xi is determined to take Taiwan, a deeper planned economy could be advantageous. By focusing on internal circulation, such an economy would reduce the impact of sanctions on China.
Simone is an independent journalist and her website is zoomingin.tv.