Home Economy, Policy & Business What has the impact of Xiconomics been?

What has the impact of Xiconomics been?

Andrew Cainey
Evaluating Xi Jinping’s economic policies five years on
Senior Associate Fellow at the Royal United Services Institute in London

Xiconomics has far-ranging and hard-to-quantify objectives, but it is still economic growth that matters most for living standards. This year, the IMF estimates that the Chinese economy will grow 3.3%—and the real number may be even lower. Youth unemployment, meanwhile, stands at a worrying 20%.

A weak economy is scarcely a surprise in a time of lockdowns and travel restrictions, resulting from China’s zero-COVID policy. Troubles in the real estate sector have also contributed to a weak economy. These too are at least partly a result of government policy to impose ‘red lines’ and reduce leverage. They represent the start of a reckoning with deep-seated problems, which should yield benefits longer-term.

Paradoxically too, Mr Xi’s dual circulation argument that the Chinese economy, rather than exports, should be the main focus has coincided with an export boom, as domestic demand weakened. Yet this does not invalidate its focus—both the growth of China’s domestic market and the upgrading of China’s industrial capabilities remain critical to future prosperity. Exports cannot sustainably be the main engine of growth for an economy the size of China. 

If living standards are to increase, Xiconomics needs to deliver productivity growth—and to do so in a way that markedly reduces inequality, so bringing about Mr Xi’s wished-for ‘olive-shaped’ income distribution, with few at the top and at the bottom of the distribution. Unlike GDP data, timely data on these dimensions is lacking. Qualitatively, however, progress seems at best mixed and likely negative. 

Innovation is a good starting point for productivity growth. Here, China continues to rise up the world rankings. In 2022, it ranked 11th in the WIPO’s Global Innovation Index, up from 34th position 10 years earlier. China’s achievements in electric vehicles, renewables and digitisation stand out. However, innovation is just one part of raising productivity across a massive population with widely varying skill levels and facing many different local conditions.

More important than breakthroughs in frontier technologies are institutional development, improved resource allocation and the dissemination of well-proven technologies. Here, progress is unclear. Stronger domestic demand rooted in individual choices rather than massive infrastructure programmes alone would have an important role to play in doing this well—and here there is little change.

Despite the rhetoric of common prosperity, there is also little sign of measures to address income inequality, beyond forced, or at least strongly-encouraged, corporate responsibility contributions by the largest tech companies. Looked at positively, the 2021 regulatory crackdown reduced the market power of these technology platforms. Delivery drivers for Meituan and small businesses operating on Taobao stand to gain at the expense of the rich. But doing enough to shift the needle on inequality across China as a whole requires much more. 

Beyond economics

The increased prominence given to security and ideology creates additional headwinds to productivity growth. Making different economic choices as a result of security concerns—however justified—means lower productivity and living standards in economic terms. When the security lens is applied to commercial decisions, the costs of compliance and review add further cost and clog up initiative. Time spent in ideological class study is time not spent on other productive activity.

For Mr Xi and the party, increased economic prosperity is but one aspect of policy success that includes the safeguarding of party rule, personal legacy, national security and pride, and China’s position on the world stage.

Faced with competing arguments about what matters most, economists turn to the concept of ‘revealed preference’ to understand what people truly value. In other words, they look at what people do, not what they say. In a time when Mr Xi talks both of self-reliance and of continued reform and opening-up, the choices made on COVID vaccines may be a portent. China has decided to forego mRNA vaccines developed in the west, while developing its own at a slower pace. Whatever the motivations behind this choice, the policy represents a very specific form of self-reliance or decoupling. China’s zero-COVID policy has massive economic costs. In the absence of more thorough vaccination efforts in China, moving away from zero-COVID might still bring a high death toll and public health costs, but mRNA vaccines have proven their worth globally. China has made a choice to not yet have them in their armoury against COVID.

However, the biggest—and most pervasive—change is in the business environment. Daily, millions of individuals and businesses make decisions on investment, purchases and career paths that will shape China’s economic future. They must do so in the face of much greater policy uncertainty than before.  This is the result of ambiguous policy slogans combined with sudden, forceful actions in a situation where economics, security and ideology are fused together, and when memories of the Mao era live on. Few would argue with the phrase ‘common prosperity’, but what does it mean specifically? When Mr Xi rails against ‘excessively high incomes’, how much is ‘excessive’? $100,000 a year or $1,000,000? Does common prosperity mean a clamp-down on profit-making or does it rather create business opportunity as the middle class grows?

The 2021 actions against technology ‘platform companies’ brought similar uncertainties, even though good anti-trust logic underpinned many of the measures. Faced with uncertainty, economic decision-makers place a greater risk premium on future outcomes. After years of ebulliently pursuing the upside, they focus on downside risk. Keynes’ ‘animal spirits’, that have driven so much of China’s dynamism, are dulled at least for now. 

In Lewis Carroll’s Through the Looking Glass, Humpty Dumpty says: “When I use a word, it means just what I choose it to mean—neither more nor less.” “The question is,” replies Alice, “whether you can make words mean so many different things.” To which there is but one reply from Humpty Dumpty: “The question is which is to be master—that’s all.”

In the wake of the 20th Party Congress, Mr Xi remains the master. Xiconomics still stands to benefit from clarity on what it does and does not mean—and so provide a more stable backdrop for economic activity, a stability that the party is said to prize highly.

* The first part of this essay is focused on the aspirations and nature of Xiconomics, and can be read here.

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Andrew Cainey
Senior Associate Fellow at the Royal United Services Institute in London

Andrew Cainey is a senior associate fellow at the Royal United Services Institute in London. He is the co-author of the forthcoming book, Xiconomics: What China’s Dual Circulation Strategy Means for Global Business. Andrew has 30 years’ experience advising governments, companies and non-profit organisations across Asia and Europe. Andrew was previously the managing partner of Booz & Company’s Greater China consulting operations; the partner leading the Rt Hon Tony Blair’s Asian government advisory practice; and the partner in charge of Boston Consulting Group’s Asian financial institutions practice. He has also been a Senior Fellow with Fung Global Institute in Hong Kong; an Associate Fellow in Chatham House’s Asia-Pacific Programme; a Senior Fellow in the Security and Crisis Management Programme (International Centre) at the Shanghai Academy of Social Sciences; and a Policy Advisor in the Conservative Party’s Policy Unit.

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