Diana Choyleva
Diana Choyleva is founder and chief economist of Enodo Economics, a macroeconomic and political forecasting company in London focused on China and its global impact. She is also senior fellow on Chinese Economy at the Asia Society Policy Institute's Center for China Analysis.
Next week, China's annual National People's Congress session will convene in Beijing. Full of pageantry, the NPC is usually a time for the Communist Party to signal action on economic growth to thousands of provincial officials in attendance.
This time, though, local officials can expect to hear a mixed message that prioritizes security over growth -- a formulation that is bound to weigh on the economy over the coming year.
"Security" has been the mantra for Communist Party chief Xi Jinping since he took power in 2012 and he has doubled down on it since beginning his third term as general secretary in 2022.
For Xi, security does not just mean tight control over popular unrest as is common to authoritarian governments. It also encompasses financial, economic and infrastructure security, a conceptual package that Beijing hopes will ensure China's central place in the world economy and the Communist Party's hold on power.
But Xi's focus on security has so far held back economic development and will remain a drag on activity this year, even if his administration rolls out new growth policies during the NPC.
China's most innovative companies are under increased regulatory scrutiny, private entrepreneurs and well-off urbanites are depressed, the U.S.-led Western world is restricting China's access to its markets and knowhow and foreign investors are leaving China.
In a macro sense, plenty of other factors are slowing down the Chinese economy, too. These include a significant hangover of bad debt at the corporate and local government level and overcapacity in both manufacturing and infrastructure which discourages additional investment.
On the demand side, Chinese consumers remain cautious after the bruising years of COVID lockdowns and the hit to their incomes and wealth from Xi's redistributive policies.
China watchers like myself look to provincial people's congresses, which are held in January and February, for clues to the party's emerging priorities.
At this year's sessions, there seemed to be a focus on belt tightening as localities internalized a key message from December's Central Economic Work Conference in Beijing. This was especially true for poorer provinces, where infrastructure stimulus is normally directed. This represents more evidence that this month's NPC is unlikely to be accompanied by the announcement of big stimulus packages.
But the shackles on the Chinese economy are more than just cyclical.
Xi's concept of security also implies self-sufficiency, in a manner harkening back to the closed economies of the Cold War rather than the open, global flow of goods and capital that drove China's 40-year economic boom. Conservative cadres resisting an "excessive" degree of market-oriented reforms are using the security imperative as a weapon against Western-style, open-door policies.
"Security" will always mean tamping down any threat to the party-state. Faced with the prospect of protests by unemployed workers, underpaid civil servants and unsatisfied homebuyers, the party-state apparatus is expected to put more emphasis on political control. Some state-owned enterprises are forming their own in-house militias.
"Security" also means financial security, as the public security apparatus is well aware that one of the leading causes of middle-class dissatisfaction and protests in recent years has been the collapse of private lending rings and other quasi-official financing schemes.
But tighter scrutiny on lending, while necessary in the face of rampant abuse, also has the effect of choking off the flow of capital to the dynamic private sector.
"Security" means too that developments in the financial and economic sectors must remain "Chinese" in nature, and that foreign activity is inherently suspicious.
Scrutiny of potential "spying" by China-based employees of multinationals is expected to intensify in 2024 and 2025, throwing a pall over foreign companies' willingness to take risks in the country's opaque market. Revisions to the state secrets law, adopted this week by the NPC Standing Committee, define state secrets so broadly that anything could be covered if the party-state decides it should be.
Cai Qi, director of the CCP Central Committee General Office, will likely be the arbiter over competing demands regarding security and the economy. © Reuters
The likely arbiter over the demands of security versus the necessities of the economy will not be Xi's corps of very capable financial cadres, but the formidable Cai Qi, director of the Central Committee General Office and a member of the Politburo Standing Committee.
Cai is a tough-nosed enforcer, and when he weighs the balance between economic growth and maintaining national security, his thumb will be on the security side of the scale.
This will leave Premier Li Qiang in an uncomfortable place. Traditionally, the opening day of the NPC is taken up with the premier's speech and detailed reports from various economically focused agencies. News agencies churn out disclosures of statistics and targets.
Many of the initiatives to be announced by Li will likely build off the Central Economic Work Conference's decision to make economic work the central task for 2024 while balancing development and security.
But this balance is precarious, and the nature of the system favors eliminating threats rather than welcoming opportunities.
What does this mean for investors and businesses? When push comes to shove in China's current climate, security will win out. That is the real central message to be expected from this year's National People's Congress.
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