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China Passes State Reforms Amidst Economic Instability

Updated: Sep 13, 2023

By Nico Herrlett

On Friday 10 March, the Chinese National People’s Congress approved what is widely considered to be the largest bureaucratic reshuffling in years. As China struggles with sluggish growth rates, slumping property prices, and low investor confidence, the reforms aim to stabilise the nation’s economy while further consolidating power around President Xi Jinping. Policy decisions made in the last few days are expected to set the tone for Chinese politics in years to come.

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The First Plenary Session

On 4 March, China‘s rubber-stamp parliament gathered for the opening speech to its inaugural plenary session. The first speaker was outgoing premier Li Keqiang. His announcement of a rather conservative five per cent target growth rate appears indicative of the challenges that lie ahead.

Finding a remedy to economic instability will be a central theme in future policymaking as China battles with low export demand, staggering debt levels and the impacts of American technology restrictions.

Power Consolidation and Party Elites

Despite the NPC‘s official status as the highest governing body under the Chinese Constitution, major policy decisions and key personnel appointments were already made in October when CCP elites assembled for the party’s twentieth congress.

After being reaffirmed as General Secretary at the congress last year, in a unanimous vote last Friday, President Xi Jinping managed to extend his tenure for an unprecedented third time. The historic removal of the two-term limit in 2018 enables Xi to resume his position indefinitely, setting the stage for lifelong leadership.

Last year’s congress saw a substantial consolidation of power around Xi, as the politburo and its standing committee were systematically reshuffled. In Xi’s new party leadership, many see an attempt to further centralise decision-making around himself by replacing reformist technocrats with loyalist acolytes.

Most notably, having been Xi’s political counterweight for years, Li Keqiang was formally replaced by Li Qiang on Saturday. China’s new head of government, who served as Xi’s former chief of staff between 2004 and 2007, is the first to assume the role of premier without previous state council experience.

Further nominations include Ding Xuexiang, He Lifeng, Zhang Guoqing, and Liu Guozhong. For some, these new personnel appointments signify a departure from an emphasis on competence in exchange for a tightened grip on power. Already in October, Xi acknowledged the strong headwinds facing his administration and his solution seems to be clear: more centralisation and an expansion of authority.

With former premier Li Keqiang gone, Xi will have to take full responsibility for future economic downfalls. How sustainable this strategy will be in the long run remains to be seen.

A Struggling Economy

Among the most pressing issues, as Xi enters into his third term as China’s top decision-maker, are economic and political turmoil since the beginning of the pandemic. Unpopular zero-Covid lockdowns ignited some of the largest mass protests since Tiananmen Square.

Far-reaching regulatory interventions in the technology and property sector only contributed to widespread uncertainty among investors and Chinese enterprises. The declining demand for Chinese exports following global hikes in interest rates, as countries battle with accelerating inflation, further discourages the demand for loans among Chinese manufacturing businesses.

provincial governments in an attempt to keep the deficit under control. In light of China’s surging debt levels since 2008, a potential ‘snowball effect’ of bank defaults poses a major threat to the financial sector and the overall economy.

Acknowledgement of this might tie the hands of government officials in providing stimulative measures necessary to boost growth in the future. Although commercial activity has shown vital signs of recovery in the first two months of 2023, experts believe this to be only a temporary rebound.

Once the gains from opening up the Chinese economy are exhausted, economic growth will be dependent on successful policy. Ultimately, a stabilisation of economic conditions will rely on the success of Xi’s new leadership team in competently addressing these issues.

Government Overhaul

In conjunction with the appointments of key positions in government, the NPC passed what Xi characterised as a “wide-reaching” and “intensive” reform plan of state institutions. In particular, the technology and financial sector are expected to be subject to vast centralisations and regulatory crackdowns.

In the context of a broader government overhaul, power will be shifted away from the state council to bureaus and institutions under the authority of the CCP, further obscuring boundaries between state and party.

Although the relationship between government and party is everything but straightforward, more broadly, the reforms appear to be in continuity with Xi’s previous efforts to introduce top-down governance and streamline institutions.

Besides furthering his influence, the reforms are also indicative of policy direction. They are perceived as building the groundwork for a further expansion of the Chinese economy and an extension of China’s global influence.

Financial Regulation

The proposed creation of a National Financial Regulatory Administration ought to strengthen and enhance supervision over China’s rapidly growing financial markets. According to experts, the body will offer crucial infrastructure to contain systemic risks posed by international financial volatility and developments in China’s tumultuous real estate sector.

A lack of transparency in the securitisation of real estate bonds carried risk from China’s property sector into its financial markets. It is argued that China’s previous institutional landscape was unable to address these issues adequately.

The new body will absorb the China Banking Insurance Regulatory Commission among several other financial watchdogs while also assuming competencies of the Central Bank; in particular regarding the management of financial holding companies such as the Ant Group.

This is only one example of how ending regulatory fragmentation will widen the party's influence on government affairs.

Self-Reliance and Global Ambitions

Against the backdrop of increasing frictions between Washington and Beijing, Xi also called for a restructuring of China’s technology sector to bolster scientific breakthroughs and further self-reliance.

In the context of a larger strategy of geopolitical containment, the Biden Administration imposed export restrictions on Chinese access to semiconductors last October. This is a technology that is seen as vital for the development of artificial intelligence systems.

A reallocation of authority within Chinese institutions ought to pave the way for self-sufficiency; an integral component of China’s agenda to expand its global influence and take over the US position as the dominant economic power.

Again, the proposal of a party-led Central Science and Technology Commission is expected to strengthen party oversight.

A Window into China’s Political and Economic Future

Until now, the ongoing commitment of the Beijing government to raising Chinese living standards has constituted an important source of political legitimacy. Whether reforms and personnel changes will be successful in addressing economic instability will determine Xi’s standing as the most important figure in Chinese politics in the years to come.

With the perpetual emphasis on the ‘great rejuvenation’ of the Chinese nation, the bar seems to be high. Only time will tell if an increasingly authoritarian leadership style is reconcilable with the economic needs of the country.

After all, it would not be the first time in Chinese history that the isolation of a party leader marked the beginning of a shift in the political paradigm, with impacts that extend beyond national borders.

Sources: Bloomberg, Financial Times, Harvard Kennedy School, Reuters, Wall Street Journal

Written by Nico Herrlett

March 2023

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