Advancing new productive forces is the direction that the PRC economy is rearing towards under CPC guidance. According to Xi Jinping, the PRC is to strengthen its ability to carry out original and fundamental research in science and technology, which would empower industrial transformation.
The focus is placed on nurturing emerging industries and developing future industries. The former refers to industries formed under major technical breakthroughs, such as aerospace, green technology, and next-generation IT, while the latter refers to those with immature technology yet great potential in the future.
A shifting focus to sci-tech development is not limited to the PRC. Both the UK and the US also identified lists of critical technologies crucial for national development and security. The PRC’s condition is unique, however, as the state could direct industrial activities and ignore free market rationales upheld by ‘Western’ countries. These plans are in line with the PRC’s long standing governance beliefs: advancing economic growth via supply-side reform and government intervention.
Reforming the Supply-side Structure
The need to advance supply-side reform was first proposed by Xi in 2015. Two issues in the Chinese economy pushed the Party Centre to advance such a policy. First, the PRC was facing extreme overcapacity in lower-end products such as crude steel, coal and oil. Overproduction caused prices to plummet, stagnating economic growth. There is also an emerging structural imbalance between the financial market and the real economy. While GDP growth from the financial industries is excelling in the mid-2010s, it significantly overruns the real economic expansion. There was fear of rising bubbles in both financial markets and real estate markets.
More importantly, the PRC lost faith in short-term fiscal stimulus. Reflecting upon Western countries’ quantitative easing measures since 2008, which failed to boost demand over a subsequent period, State Council experts deemed it more important to resolve structural issues, defusing any mid to long-term risks that may haunt the PRC. There is a belief that innovation and development will ultimately provide new options for consumers, which opens new channels of demand. The policy focus was then placed on pruning overcapacity, lowering financial leverage, and pursuing industrial upgrades. To guarantee that all sectors will stick to the plan, however, state regulations would have to be strengthened.
Advancing Government Intervention
While both the state and domestic researchers recognised the importance of allowing market-based resource allocation to work without external disturbance, the Party is wary of unforeseeable risks by leaving capital unregulated. The Party asserted that the state’s role in preventing malfunctions of market mechanisms is crucial for building a mature socialist market economy. In its own words, the state ‘would not serve merely as a night watchman’.
Instead, it would actively step into the market, setting general directions for development.
In the 2021 Central Economic Work Conference, the CPC articulated the need to prevent the ‘disorderly expansion’ of capital. While economists explained that capital itself is not a problematic existence in the PRC system, monopoly and ‘incorrect’ financial decisions are viewed as damaging to economic development. Criticism against multi-layered financing, high-leverage rates and foreign capital interference is expected, yet those who invest in areas that do not align with central supply-side goals are also warned.
State criticism was largely directed towards private enterprises. Jack Ma’s Ant Finance, for instance, was barred from IPO at the last minute by state authorities. Ant Finance was designed as a platform to provide funding for medium and small-scale enterprises, with Ma claiming that he aims to change how the banking system works in the PRC. It clearly provoked the state’s monopoly over macroeconomic governance, while disregarding the Party’s concern over subprime lending. The case laid out the consequences that private companies would face if they do not adhere to state directives.
A Return to Planned Economy?
Some critics pointed out that what counts as ‘disorderly expansion’ depends on the state’s arbitrary will, which reflects a potential return of the planned economy in the PRC. According to Xi himself, that is not the case. For him, state interference is a way to address ‘the blindness of the market’, which allows the PRC to thrive and outshine traditional capitalist states. A major challenge that the PRC has to address, however, is how to respond to low demands in the short term, when its supply-side strategies have yet to come into fruition.
As researcher Zhang Bin, from the China Finance 40 Forum (CF40), points out, the sales growth rate for retail goods in 2024’s Q1 is lower than both the 2023 annual rate and the 2023 Q1 rate, reflecting limited expenditure. Meanwhile, investments in public infrastructure plummeted, with institutions unwilling to lend or borrow. China Merchants Fund Research Chief Economist Li Zhan recommended looking outwards, deeming new productive force exports the prime driver for 2024 growth. The need for export explains why the PRC has strongly refuted claims regarding EV overcapacity.
Meanwhile, how state guidance could be balanced with commercial decisions remains unclear. Official oversight has only stretched outwards since 2023, with a Central Financial Commission created to guide national financial development. The CPC has also rapidly expanded Party cell presence in private enterprises and e-commerce platforms, requiring members to adhere to central directives. If the market mechanism is vital for PRC economic growth, there is a need to reaffirm its role in directing resource allocation, attaining an equilibrium between non-public growth and long-term strategic development.
Image: King of Hearts
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