On Sunday, May 15, the Communist Party’s flag journal Qiushi published an article by Xi Jinping titled Correctly Understanding and Grasping the Major Theoretical and Practical Issues of China's Development [CN | EN]. This article outlines Xi’s economic priorities:

Transcript (with minor edits)

For background, the content of this article comes from Xi’s talk at the Central Economic Work Conference back in December. Convened by the Central Committee and the State Council, the annual Central Economic Work Conference is the top economic policy planning conference in China. It brings together policymakers from across the nation, including at central and provincial levels. And it sets the economic policy direction for China in the following year.

I think Xi’s article is worth our attention for two reasons. The first is its content:  it outlines Xi’s economic priorities and gives us insights into what may be prioritised during Xi’s potential third term in office after the 20th Party Congress later this year.

And the second reason is to do with timing and politics: China’s economy is encountering headwinds as is Xi’s economic policy from inside the Party. We are in the last stretch before the 20th Party Congress; a lot of political jostling is happening as we speak.

People read a lot into the timing of publication of recent speeches and articles by Xi Jinping vis-a-vis other leaders, such as Li Keqiang, and try to figure out the changing power dynamic behind the scene. Wall Street Journal, for example, recently published an article titled China’s Forgotten Premier Steps Out of Xi’s Shadow as Economic Fixer. The article’s thesis is that Li Keqiang is re-emerging as a counterbalancing force to Xi due to the latter’s failed economic policies. The article quotes information from “people close to decision-making”.

We should read these kinds of articles with scepticism, and first question why these “people close to decision-making” in China are talking to WSJ in the first place.

What do the storytellers want to tell us, and why?

In any case, if Xi is making a retreat on economic policy, I think it's tactical rather than a shift in underlying priorities. This is because Xi’s economic policy is intertwined with his political ideology, and you can’t have one without the other.

The publication of the Qiushi article illustrates that Xi’s economic priorities have not really changed.

So, what does Xi say in this article?

Xi addresses five issues:

1. Common prosperity
2. Capital
3. Primary products
4. Risks
5. Carbon

The ordering of these issues tells us about their relative importance for Xi. After first launching the idea of Common Prosperity in August last year, we’ve seen curiously little mention of the idea by Party-state media. Some China watchers thought the idea was stillborn and consigned it to the dustbins. It’s somewhat of a surprise that Xi put it first among his economic issues; it tells us that it still has currency.

Common prosperity – what is the problem? In Xi’s words:

In the past, we were egalitarian at a low-income level. After the reform and opening up, some regions and some people became rich first, and the income gap gradually widened. The improper accumulation of some wealth has brought risks and challenges to the healthy operation of the economy and society.

Here, Xi is linking China’s current economic troubles with income and wealth inequality accumulated since the reform and opening started, and he gives a nod to the egalitarian past before the reform and opening up started.

What does the path to common prosperity look like? Xi says they are still exploring this question, and achieving common prosperity would be a long term historical process.

For Xi, China must not only make the cake bigger, but it must also divide the cake well; China must find a good balance between growth and distribution through reasonable institutional arrangements.

He goes on to talk about employment, the real vs virtual/financial economy, institutions and welfare etc, but the central message is clear: growth alone is no longer the priority; it is now about the fair distribution of this growth. And to make it fairer, of course, the role of the government, to Xi, must also expand.

The role of the state in the economy, and the balance between efficiency and equality are always subject to debate. The problem is China’s superstructure where the Party-state is not counterbalanced by other social forces as you do in say liberal democracies. There is very little an average citizen or investor can do to resist the state.

Moreover, we have seen again and again in the history of the Communist Party how one-mindedness and echo chambers could lead to disaster. At the very least, we should be highly aware that policy pursued with good intentions can often lead to poor outcomes.

The second issue that Xi looks at is capital, how it behaves in this day and age, how to harness it, and how to regulate it. He starts by asserting that the goal of capital is the same whether under capitalist or socialist systems: the maximisation of profit.

For Xi, the problem is not capital per se, but rather the lack of adequate supervision of capital. According to Xi, this has allowed capital to expand in a disorderly way, manipulated the market and make huge profits.

The solution according to Xi is to set up a “traffic lights” system. Since all the roads need traffic lights to avoid crushes and improve efficiency, the same should also apply to how capital operates. And this would stop capital from exploiting consumers for example. And the regulatory system is the traffic light system.

Xi’s crackdown on Chinese tech is an example of the regulation of capital. How to regulate big business and tech is something that many countries around the world are grappling with, and China is no exception. In short, capital in China’s socialist marketplace needs to serve the aims of the state. Again, it's an argument for increasing the role of the state.

The third issue for Xi is guaranteeing the supply of primary products, such as food, raw material and energy. For Xi, this is a strategic issue. He wants China to high a degree of self-sufficiency in the production of primary products, with a big role for state-owned enterprises, including for example in the energy sector.

He particularly emphasises the need for food security: “Chinese people’s rice bowls should be firmly in their hands at all times, and our rice bowls should mainly contain Chinese grains”

On the raw products that sustain a people and on which the physical economy is built, Xi wants to move China towards self-sufficiency. This is no surprise given the increasingly uncertain global environment: climate change, wars, geopolitical competition, etc.

The fourth issue is major risks: how to prevent and resolve them. Here Xi identified a number of challenges to China’s financial system. The first challenge is the accumulation from the past, such as shadow banking, internet financial risks etc. These are risks that according to Xi, Beijing has already dealt with, but some risks are lingering today.

The second is the lack of regulatory capacity and institutional deficiencies, and the third is irresponsible behaviour by borrowers leading to excessive leverages and exposure to risks. The fourth is that collusion and corruption between officials and businessmen — the marriage of big money with the bureaucracy. Fifth, a downturn in the economic cycle compounded by the other risks mentioned above.

Xi especially mentions real estate as a sector that faces risks and needs regulatory attention. This is not surprising given what we know about China’s real estate sector.

The final issue Xi writes about is carbon. Carbon neutralisation is important for promoting high-quality development. Here, Xi scolds officials for taking measures that are short-sighted, such as cutting off power to make carbon reduction targets. He writes:

The adjustment of energy structure and industrial structure cannot be accomplished overnight, let alone divorced from reality. If the gradual withdrawal of traditional energy is not based on a safe and reliable alternative to new energy, it will have an impact on economic development and social stability. Pollution reduction and carbon reduction are an integral part of economic restructuring.

Essentially, carbon reduction is about structural adjustment instead of short term measures that make the figures look good, especially if these measures hurt socioeconomic development.

There you have it, Xi’s views on five priority economic issues. All in all, we see the priority is no longer on growth alone, but on inequality and equality of the growth. The focus is now on how to cut the cake instead of how big the cake gets. And at the heart of all, it is about the role of the state — in Xi’s view, the state can make it right.