Second Takes on China’s Foreign Economic Policy after the 2023 Two Sessions and 20th Party Congress

China’s 20th Party Congress in October 2022 and its March 2023 “Two Sessions” revealed the new top leadership of the Chinese Communist Party (CCP), confirmed China’s top government officials, shed light on the CCP’s current agenda, concerns, and dogmas, promulgated new policies, and presented the government’s work program. On the personnel front, there is wide agreement the two meetings strengthened Chinese President Xi Jinping’s control, demonstrated the import of proper political credentials, and signaled the dominance of the party over the government and all Chinese firms, state-owned or otherwise.[1] On the policy front, the dominant takeaways are that China is consumed with internal and external security, seeks greater independence in multiple economic realms domestically and internationally, prioritizes high quality/selective growth (versus high GDP growth) and job creation, wants to boost domestic consumption, production, and supply chains, and will continue to act assertively towards the United States (US) on all fronts.[2]

All the above will challenge foreign companies. Given the worth of political versus economic credentials, many newly anointed CCP leaders and government officials neither possess great economic expertise nor experience.[3] According to some commentaries, reform minded policymakers are in the minority and many new leaders are dedicated “techno-nationalists,” disposed to policies supporting self-reliance and independence.[4] Deeper CCP involvement in all aspects of the economy may mean foreign businesses may find themselves dealing with greater red tape and political interference and/or bureaucrats paralyzed with indecision or prone to decision-making based on political than economic criteria. The new political environment, which suggests a single-minded focus on security/stability and CCP/state control, further may squelch economic dynamism, entrepreneurship, and experimentation.[5] This, in turn, may suppress national and sectoral growth rates. Growth rates will face challenges, too, because of the devaluation of headline growth. Forceful action already is constrained by the country’s high debts, high unemployment, troubled real estate sector, external demand, and ageing population.[6] Lastly, foreign firms which are American (perhaps even Western) and/or in sensitive industries like the financial or technology sector may encounter stricter oversight or limitations on business operations.[7]

There, however, are some grounds for optimism. Xi’s tremendous power means he has the ability to “cut through vested interests” and bear the “economic price of reform.”[8] Those focusing on his inner circles contend they should be more willing to speak freely. Moreover, some of them have launched economic reforms, engaged well with foreign businesspeople, or spent time in some of China’s more developed and internationalized cities and provinces.[9] On top of this certain government officials such as the head of China’s central bank kept their posts.[10] Others point to soothing words that have appeared in leading policymaker statements and CCP and Chinese government reports.[11] Objectively speaking, China’s aforementioned challenging economic (and political) situation actually may catalyze reforms, the pursuit of foreign direct investment (FDI), and efforts to pursue better relations with other governments, albeit not the US. There are those that call our attention to business and investment opportunities that may flow from China’s quest to achieve self-sufficiency in agriculture, food, tech, energy, and medical goods, improve education, healthcare, and upgrade industry, and close regional disparities.[12] Aside from this, the two meetings make clear Beijing will continue pushing the Belt and Road Initiative (BRI).[13] This could create openings for foreign firms that can provide the goods and services China needs to move the BRI forward.

Policymaker words and government deeds over the past six months have lent some support to the optimist position. Regarding words, in mid-March, at the first State Council meeting following the Two Sessions, new Premier Li Qiang said, “‘‘we’ll deepen economic reform and opening…boost development and the private economy, and stabilize’” FDI.[14] As for deeds, China’s Revised Foreign Investment Catalog, which became effective this year, increased the number of encouraged items and opened numerous opportunities in areas relating to advanced component and parts manufacturing, green energy and environmental services, and the supply of healthcare goods as well as health and elder care services. Even before this, China had been moving to reduce taxes, facilitate land access, and create a level playing field.[15] Recent data shows China is moving much more rapidly to approve foreign video games.[16]

Many pieces about the 20th Party Congress and Two Sessions conclude with phrases: “time will tell” or “implementation is key.” While true, such phrases are banal and not very useful to businesspeople and policymakers wondering if they should embrace the optimist or pessimist case. One way out of this uncertainty is to focus on structural conditions rather than personalities (though because of his tremendous power Xi deserves greater consideration than most), words, and isolated deeds. Specifically, while foreign companies remain important for China in terms of output, trade, tax revenues, “technology,” and employment, they are not as important, relatively speaking, in these areas as before. They also are not likely to be willing or able as in the past to help China meet some of its narrow objectives or will be viewed suspiciously or used exploitatively when they are willing and able. Beyond this, they are limited in their ability to “leave” due to political and economic conditions in alternative markets such as Brazil, India, or Vietnam. Unfortunately, the above collectively means the bargaining power of foreign businesses is declining and substantive accommodation and reforms therefore are unlikely. There will be opportunities going forward, but their future will be brightest only when they have found ways to obtain greater bargaining power.

Image used pursuant to Creative Commons License: https://commons.wikimedia.org/wiki/File:Great_Hall_Of_The_People_At_Nigh...