China’s Congress: an inflection point?

The 20th National Party Congress of the Chinese Communist Party is expected to confirm President Xi Jinping's third five-year term as General Secretary, marking a break from the two-term convention established under Deng Xiaoping.

• This shift signifies the end of the collective leadership model favored by Deng and Hu Jintao, replacing it with an increasingly authoritarian, personalized concentration of power centered on Xi.
• The composition of the upcoming Politburo Standing Committee will be a critical indicator of whether policy shifts toward pragmatism occur; a more balanced committee or the inclusion of leaders like Wang Yang (potential Premier) could signal a counterweight to Xi's dominance.
• Susan Shirk notes that while over-concentration of authority accelerated under Xi, aggressive international and repressive domestic policies arguably began during Hu Jintao's second term.

Goldman Sachs Chief China Economist Wei Shan argues that the Congress is unlikely to trigger an immediate pivot in cyclical economic policies, particularly regarding the Zero-COVID strategy.

• Goldman Sachs does not expect an immediate reopening post-Congress due to medical readiness concerns, specifically:
  • Low vaccination rates among the elderly.
  • Insufficient progress in drug approval and treatment development.
  • Public fear driven by government communication that overstates the severity of the virus.
  • Current guidelines treating every positive case as requiring hospitalization, which would overwhelm the healthcare system upon reopening.
• Structural long-term policies such as "common prosperity," "housing for living not speculation," environmental protections, and national security self-reliance (food, energy, semiconductors) are not expected to change.
• These structural shifts prioritize security and quality over efficiency, contributing to a projected decline in China's long-term growth rate.
• GDP growth forecasts indicate:
  • Current year: 3% (significantly below the government's target of ~5.5%).
  • 2023–2024: ~4.5% (driven by assumptions of eventual reopening).
  • 2025 and beyond: Below 4%, establishing a baseline trend of slower growth.
• Demographic headwinds, including population decline, are viewed as permanent structural factors that will continue to dampen GDP growth potential.

Tsinghua University Professor David Lee predicts a fundamental reprioritization of economic growth immediately following the Congress to mitigate social and international risks.

• Lee contends that without restoring moderately fast growth, social stability and U.S.-China tensions cannot be effectively managed.
• Anticipated policy adjustments include:
  • Explicit reassurances to private entrepreneurs that they are integral to the "common prosperity" agenda, reducing ad hoc regulation and taxation.
  • A tapering of the regulatory crackdown on internet platforms, as political risks are deemed mitigated.
  • A return to GDP growth, tax revenue, and employment as primary Key Performance Indicators (KPIs) for local government officials.
• Lee challenges the narrative that demographic decline is a primary growth inhibitor, arguing that "human resources" (healthy population combined with education levels) remains a driver.
  • China currently produces 10 million college graduates annually, with 40% in engineering majors.
  • High savings rates and the capacity to emulate Western technology sustain growth potential for another one to two decades.

Expert analysis suggests that while Xi Jinping may desire to resolve the Taiwan issue during his third term, the risk of failure acts as a significant deterrent.

• A failed military move on Taiwan is widely believed within China to threaten the survival of Xi's leadership and potentially the Communist Party's rule.
• The geopolitical context of the Ukraine war encourages greater caution regarding military adventurism.

U.S.-China foreign policy relations are described as currently unbalanced, characterized by bipartisan U.S. consensus on containment and a lack of diplomatic engagement for six years.

• Susan Shirk calls for a return to "good old-fashioned diplomacy" post-U.S. midterms to test if negotiation can moderate Xi's policies.
• Potential areas for negotiation include South China Sea incidents and specific economic policies, contingent on face-to-face meetings between leaders.
• There is a concern that U.S. sanctions and over-reaction to China's overreach are damaging American competitiveness by driving talent and innovation away.
• The diplomatic challenge for the U.S. and allies (Japan, Europe) is to signal openness to a "responsible global power" China, offering Xi a path to influence through restraint rather than conflict.