Xi’s Bet on Manufacturing Capacity Can Still Pay Off for China

Xi’s Bet on Manufacturing Capacity Can Still Pay Off for China
Chinese President Xi Jinping sits beside South African President Cyril Ramaphosa during a signing ceremony by their Cabinet ministers, in Pretoria, South Africa, Aug. 22, 2023 (AP photo by Themba Hadebe).

Anticipation is growing for the Third Plenum to be held by the Chinese Communist Party next month. The meeting has usually taken place in the early part of the five-year Party Congress to define and articulate the reform agenda for that term of the party’s leadership. Its delay last year caused concern about a perceived lack of urgency to adopt new approaches during President Xi Jinping’s third term in office to stabilize China’s economy after several years of disappointing growth.

This lack of urgency contrasts with a surprisingly candid discussion among Chinese policymakers and academics about the need for significant reforms to bolster growth, restore confidence and address long-standing problems such as local protectionism and regional inequality. For example, former Finance Minister Lou Jiwei has called for the abolishment of the household registration system, known as hukou, which divides rural and urban Chinese into starkly different welfare regimes. Many have also called for significant changes to China’s taxation system to alleviate the burden of unfunded central mandates on local governments. The overall consensus seems to be that Xi has so far taken a wrong turn in guiding China’s economy, and the hope is that the Third Plenum will offer some signals that “Reform and Opening”—the term used since 1978 for China’s post-Mao economic liberalization—will return with a vengeance.

Those who expect significant reforms in this direction are likely to be disappointed. Insider speeches and official summaries of Xi’s policies continue to focus on supply-side expansion through investment in industry and manufacturing. The Third Plenum is therefore likely to lock in Xi’s rejection of a reform agenda that focuses more squarely on expansion of domestic demand, direct transfers to households and fundamental structural reform of institutions that cause inequality and regional development gaps.

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