The Chinese Communist Party concluded the Third Plenary Session of its 20th Central Committee in July. Based on the communiqués released before and after the meeting, it appears that China still intends to pursue the path of reform and opening up. For example, we see phrases such as “reform will not pause, and opening up will not stop,” “the market plays a decisive role in resource allocation,” and “those with stable property have stable minds.”
However, the “reform” in Xi Jinping’s discourse is vastly different from what the West understands as “reform.” The West’s understanding of reform is rooted in the era of Deng Xiaoping, characterized by a move towards a market economy and, to some extent, political liberalization.
Today, under Xi Jinping, the CCP has only inherited the term “reform and opening up.” Its essence has completely changed. Xi Jinping has been explicit about this. In an article in May this year, he stated that “some people define reform and opening up as moving towards Western ‘universal values’ and Western political systems, otherwise, it is not reform and opening up. This is a misinterpretation of our reform and opening up.”
At the Third Plenary Session, the Communist Party re-emphasized the true meaning of reform: “No matter how reform progresses, the fundamental aspects such as the full leadership of the Party, adherence to Marxism, the path of socialism with Chinese characteristics, and the people’s democratic dictatorship cannot be shaken.” China’s reform “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 but a routine action in governing the country. In fact, the “reform” that the CCP talks about 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.
Adam Smith in his An Inquiry into the Nature and Causes of the Wealth of Nations 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 starts to show 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, indications are that Xi might be pivoting towards a more “planned economy” to solve these problems.
On June 3, the State Council of China mandated that central-government-owned enterprises in non-financial sectors are prohibited from establishing, acquiring, or holding shares in any financial institutions. This directive, known as the “withdrawal from financial sector order,” aims to prevent state-owned enterprises (SOEs) from neglecting their core businesses and to mitigate the risks posed by financial institutions. The underlying message is that the Chinese Communist Party (CCP) anticipates turmoil in the financial sector and is ensuring that state-owned entities exit safely.
Another notable event is that 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 Party. 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 help and stimulus efforts in electric vehicles (EVs), real estate, and the stock market in the first half of the year have all been ineffective.
Since Xi Jinping took office, China has vigorously developed the EV sector. Xi’s vision for EVs is not merely as a profitable industry but, according to his various speeches, as a key sector to revive the Chinese economy. However, the United States has imposed a 100% tariff on Chinese EVs, and the European Union has added a 30-40% tariff.
The largest markets in the world are China, the EU, and the US. Now, China faces setbacks in both the EU and the US. In other regions, such as Southeast Asia and South America, momentum is also weakening. Tensions with the Philippines and Argentina’s exit from the BRICS group, coupled with India’s rise, mean that China can mainly rely on its domestic market, which is insufficient to support the entire economy.
That is to say, China’s EV industry has suffered a significant blow before it could become a substantial pillar of the economy to replace the real estate sector.
From last year to this year, Xi has also heavily restructured the financial industry. However, the Chinese stock market has fluctuated around 3,000 points. The government has invested 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 (SMEs) continued to decline. Now, the Shanghai Composite Index has fallen below 3,000 points again.
Regarding the real estate market, it is beyond rescue. Sources in China indicate that real estate developers will not buy land anymore. Developers view the government’s stimulus policies as a ploy to get them to buy land again, given the government’s financial difficulties. Consumers are also reluctant to invest in real estate due to a clear pattern of chasing rising trends and avoiding declining trends for Chinese investors. With the real estate market in such a slump, even if the government lifts all purchase restrictions, people will not buy because the expectation of rising prices has vanished. Buyers would rather wait for prices to bottom out.
Furthermore, China’s population decline means that housing supply far exceeds demand. Chinese residents’ savings are increasing, indicating a firm resolve not to invest, buy houses, or spend.
To sum it up, up until today, all of Xi Jinping’s attempts to rescue the economy on a market economy basis have failed or hit clear ceilings.
In this context, Xi Jinping signifies a shift towards a deeper planned economy. This shift is supposed to eliminate issues arising within the market economy and mitigate the crisis of declining authority of the CCP due to governance failures.
Evidence of this intention includes the recently passed “Law of the People’s Republic of China on Rural Collective Economic Organizations,” which will take effect on May 1, 2025. 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 1970s, which rendered the farmers great autonomy in managing those 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. Any forceful action against Taiwan, whether a blockade, amphibious landing, or gray zone operations, would likely lead to economic sanctions from the US and other Western countries. Exports and imports would be severely impacted, and financial sanctions could include asset freezes and expulsion from the SWIFT system. Under a planned economy with a focus on internal circulation, such sanctions would have a reduced impact on China.