Core Priorities

Xi Jinping’s China continues to raise more questions for investors than the Party is capable or willing to answer.

Following the conclusion of the annual economic work conference, markets learned that domestic demand, easily the most pressing issue facing the world’s second-largest economy, will play second fiddle next year to the building of a “modern industrial system,” which took the top spot on a list of key priorities.

“It is necessary to promote industrial innovation through science and technology, especially disruptive and cutting-edge technologies to spawn new industries,” a characteristically wordy readout of the proceedings published by Xinhua said. China, the Party emphasized, “must accelerate the development of artificial intelligence.”

There are two issues. First, Washington is determined that to the extent Xi succeeds in constructing his “modern industrial system,” it’ll be solely the result of domestic Chinese innovation, and won’t be built on the back of Western technology. The Biden administration continues to turn the screws on Beijing in that regard, restricting Chinese access to chips and limiting US investment in the very same strategic sectors China is determined to bolster.

Second, the problem for the Chinese economy at the current juncture isn’t a lack of advanced chat bots, it’s a moribund consumption impulse. As discussed here earlier this week, consumer price growth spent the last six months teetering on the edge of deflation, and there’s scant evidence to suggest a turnaround is imminent. In fact, there’s every reason to suspect that Xi’s domestic policy agenda, including subjecting Chinese to two years of draconian public health measures, has permanently impaired consumer psychology.

The Party’s aware of the consumption problem, of course. Promoting domestic demand is the second priority for 2024 behind industrial modernization. “It is necessary to form a virtuous cycle in which consumption and investment promote each other,” the readout of the economic conference declared, before listing a variety of “new consumption growth points” the Party would like to develop including, but not limited to, “smart homes, entertainment and tourism, sports events and domestic ‘trendy products.'”

That’s not going to cut it when it comes to inspiring confidence. The Party said more about its aspirations for promoting consumer spending, but if there’s a concrete plan for reinvigorating the consumption impulse, it wasn’t evident.

“Opening up” took the fourth spot on the nine-point list of priorities. Xi will “continue to build a market-oriented, legal and international first-class business environment,” the readout said. Further, the Party will promote an “Invest in China” message. There’s no time to waste. Because people aren’t. Investing in China, I mean. The figure below shows direct investment liabilities from SAFE’s balance of payments data. Q3 saw the first drop since at least 1998, when the series began.

I won’t pretend to be an expert on that data. Apparently, the negative reading is a reflection of foreign companies’ reluctance to reinvest money earned in China. You could attribute some of the decline to high cash rates in the developed world, but friction between Xi and the West, as well as pressing concerns about the business environment in China, doubtlessly played a role, as did related worries about the perils of supply-chain over-dependence.

Xi was in San Francisco last month to reassure US business leaders that China is still a welcoming environment, but show me someone who believes him and I’ll show you someone who’s in denial.

The Party offered nothing new in the way of guidance around the flailing property market that Xi inadvertently (or not) torpedoed two years ago. Beijing will “actively and steadily resolve real estate risks, meet the reasonable financing needs of real estate enterprises and promote the stable and healthy development of the real estate market,” the readout of the work conference said. As to the local debt risks Moody’s cited in cutting China’s outlook earlier this month, the Party said “provinces with major economies must truly take the lead and make greater contributions to stabilizing the national economy.”

Notably, Xi skipped the second day of the meeting in favor of a state visit to Vietnam. It was, by some accounts anyway, the first time he’s done that since ascending the ranks. Bloomberg pitched it as the latest in a series of precedent-breaking maneuvers which, when considered separately, don’t amount to much, but when taken together, suggest Xi’s marching to his own drum.

The most important takeaway from the readout of the annual economic planning pow-wow was what it didn’t contain — namely, anything tangible on stimulus. SCMP wrote that “Beijing’s two-day central economic work conference ended with a clear message that leaders are keen on injecting life into the nation’s struggling economy,” but from where I’m sitting (which is admittedly not in Beijing or Shanghai, where the linked article’s authors reside), the statement was just the usual recitation of promises, aspirations and grandiose rhetoric with little (to no) indication of how the Party intends to go about placating anxious households, impatient investors and flighty foreign capital.

It’s entirely possible (indeed it’s likely) that Xi doesn’t actually care all that much about investors or foreign capital, but he does care about households. Or at least he pretends to. The ninth and final priority on the list was the “effective protection and improvement of people’s livelihood.” “We must insist on doing our best, within our capabilities,” the Party said, of that effort.

Towards the end of the comically lengthy “summary” run by Xinhua, the statement added a boilerplate, if crucial, exhortation: “The entire party” is urged to “unite closely around the Party Central Committee with Comrade Xi as the core.” Now that’s a priority.