The Central Committee of the Communist Party of China (CPC) convened behind closed doors in Beijing this week for its fourth plenary session, with drafting a five-year plan for the country’s social and economic roadmap high on the agenda.
Right now, there are many structural issues with the economy that need to be addressed, and analysts say Chinese policymakers are balancing efforts to boost consumer spending while also encouraging growth for high-tech industries.
For decades, the world’s second-largest economy has been driven by export trade and infrastructure investment, while the third pillar, domestic consumption, has been neglected.
As China’s export and infrastructure engines falter, boosting domestic consumption has become more urgent.
“The mood among private households and consumers in China is very gloomy,” said Alexander Brown, China analyst at the Mercator Institute of China Studies (MERICS), a Berlin-based think tank. “Nevertheless, given the current geopolitical situation and China’s goal of flexibility, Beijing will spend its money primarily on industrial policy.”
Building high tech vs helping homes
One of the top strategic challenges for Beijing coming from the United States under President Donald Trump is access to advanced semiconductor technology, which is critical to powering AI-based strategic industries.
The most advanced chips continue to be manufactured by American companies such as Nvidia, which has been at the center of on-and-off control over the processing power of chips that can be delivered to the Chinese market.
It is important for China to develop semiconductor sovereignty. Last week, Trump also repeated his threat of triple-digit tariffs on Chinese imports after Beijing signaled it would impose greater controls on exports of rare earth minerals.
As Washington tries to cut China off from the US-led high-tech ecosystem, geopolitical competition is a bigger concern for Beijing than structural problems with the economy, Chen Bo, senior research fellow at the National University of Singapore’s East Asian Institute, told Reuters news agency.
Chen said the policy document emerging from the plenary session, which ends on Oct. 23, “will emphasize and re-emphasize support for high-tech research and industrial development.”
The analyst said manufacturing remains a “top priority” in terms of China’s hard power.
“When conflicts arise, ultimately it is manufacturing that matters, not services,” Chen said.
However, supporting the development of high-tech industries with government support means that there will be fewer resources left to stimulate consumer spending.
Xi’s vision of the future
In July, Chinese President Xi Jinping emphasized in a speech that the world “is currently undergoing its deepest changes in a century, with the scientific and technological revolution and competition among major powers becoming increasingly interconnected.”
Xi also called for China to play a leading role in the development of science and technology.
China is already a world leader in areas such as electric mobility and renewable energy.
And, except for a few sectors such as semiconductors and commercial aviation, China has established almost its entire supply chain within its borders.
China is also steadily increasing its investment in high-tech industries to further strengthen its economic sovereignty and reduce its dependence on the few sectors where it does not already dominate.
How can Beijing encourage consumption?
However, Beijing has not completely given up on tackling the structural problems in its economy.
At a session of the People’s Congress in September, discussions were held on how to increase the share of disposable income of private households and consumption in the economy.
Private consumption in China currently accounts for about 40% of economic output, much lower than the 60% of Western countries – in the US, the figure is as high as 70%.
Some Chinese think tanks have proposed increasing private consumption by 50% within 10 years.
In recent months, Beijing has already announced measures such as consumer subsidies, pension increases and childcare allowances, and made some reforms to social protection.
Merix analyst Brown believes these moves have essentially been “forced” by problems such as demographic change, overcapacity and declining exports.
“I believe that such measures, although not extreme, will continue to be taken over the next five years,” he told DW.
Larry Hu, chief China economist at Macquarie Group, told Reuters he expected Beijing to take action to stimulate domestic consumption when it becomes clear that external demand has shrunk enough to threaten growth targets.
“If you depend only on external demand and domestic demand is not working, you will have the problem of unemployment and also deflation,” he said. “If it continues like this for a year or two, that’s fine. But in the long run, it will definitely be a problem.”
After all, it is much cheaper to stimulate domestic consumption, especially at a time when Beijing’s fiscal leeway is already limited due to the real estate crisis, high debt levels and low growth rates.
According to Citigroup, the Chinese government will need to invest 20 trillion yuan (equivalent to $2.81 trillion) over the next five years to truly address the imbalance between supply and demand in the Chinese economy. This will be equivalent to 15% of China’s GDP in 2024.
For now, that means Beijing will prioritize directing resources into industry, where it now sees potential for growth, said Brown, the Merix analyst.
He said, “They will continue to invest resources primarily in technology industries where there is an opportunity to become world leaders. Hopefully these achievements will generate a lot of money. This money, or tax revenue, can eventually be distributed throughout the economic system.”
This article has been translated from German