Beyond third plenum: China’s slowing economy demands a more consensus-based approach from Beijing

More than three hundred members of the ruling Chinese Communist Party are gathered in Beijing this week. Their task is to conduct a high-powered meeting known as the ‘third plenum’ to review the state of the Chinese economy, something that they do every five years. The outcomes of the meeting will determine the future course of the country.

President Xi Jinping is also going to be there to offer his leadership on how to improve the economic scenario in China. The state media is heralding the meeting as a significant one, one that can overturn China’s fortunes for good. After all, such plenums in the past have actually transformed China’s destiny. The famous Plenum of 1978 had proven crucial in reforming the country from a Marxist economic failure to an export-intensive economy. But this time the plenum is more like a damage-control exercise. The Chinese economy is undergoing a slowdown, and there is little that can be done about it.

Today, China is the second-largest economy in the world, with a GDP worth $18 trillion. Its double-digit growth in the last three decades has made it an Asian economic powerhouse, with Japan and India left miles behind. However, now there is a slight change in the China growth story. The Chinese economy has slowed down to a single-digit growth rate. This fiscal year, it is expected to touch just 4.5 per cent. As per the IMF, the slowdown is going to get worse with the economy decelerating to a 3 per cent growth rate by 2029.

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The country’s economy is already showing signs of great distress. It grew at a rate of just 0.7 per cent this quarter, which is even worse than what the economists had predicted. The immediate reason for this slump in the economy is the collapse of the property sector. Real estate, which had emerged as the top driver of the Chinese growth saga, is currently experiencing its worst ever days.

The industry once contributed around a third of Chinese GDP and, at $60 trillion, was considered the biggest asset class in the world. Like Indians, Chinese also associate owning a home with stability and security, and thriving on this very sentiment, the real estate sector pushed China towards greater economic heights.

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The charm of owning a home and the financial security that it provided were so high that an average Chinese person was more likely to invest in property than in the stock market. Many big players had benefited from the housing boom in China, with developers such as Evergrande and Country Garden laughing all the way to the bank. But one day, all this came to a screeching halt. Soon after he took control of the country, Xi Jinping took early measures to rein in the property sector in China.

Although the real estate bubble burst due to his policies, what also speeded up the process was the Covid-19 pandemic. Due to the pandemic, a large number of people lost their jobs and had to move back to the countryside. With this, the demand in the real estate market was at an all-time low, and so was the role of this sector in driving the Chinese economy.

Under Xi Jinping’s command, the government has offered stimulus to the real estate sector, but even that hasn’t been able to make people buy more property. China has also tried to revive consumer demand in the economy by building more and more factories, but even the goods produced at these manufacturing units have no takers. Despite the companies reducing prices to attract consumers, there is a vast inventory of goods that remain unsold. The same is true for the industrial capacity of the country, which is suffering from a problem of great overproduction.

Forget the local consumer demand; now China can’t even rely on exports as a bailout from its current economic troubles. A persistently high deficit has, of late, become a big issue for almost all its major trading partners. Along with this, the increasingly aggressive stance of China in the geopolitical sphere has led to a great degree of caution among countries across the world. This means they are no longer willing to fund China’s rise by giving access to their markets on a plate. There is currently a global backlash of tariffs against China, where countries including the United States and India are not only trying hard to protect their local industries by imposing high duties on imports but are also trying to use trade as a weapon to punish the country for its behaviour.

What strikes the most about China’s economic woes is the fact that it is no longer just a pandemic problem but a perennial problem. Initially, there was a tendency in China to ward off the economic slump as a side effect of the global pandemic, but now the realisation is dawning that it is something that is going to stay even in the long term.

China’s model of growth was driven by its labour-intensive economy that mass exported products across the world but the advantage of cheap labour is now gone. At around 1-10th the cost, India’s vast pool of labour is now emerging as a much better choice. The hourly wage rates in China have ballooned in the last decade. Along with this, the brute truth is that China is soon going to be a country of ageing people.

In 2023, India overtook China to be the most populous country in the world. But while 65 per cent of India’s population is below 35 years of age, 30 per cent of China’s population will be over 60 years of age in 2040. By 2060, China will be the oldest country in the world leaving Japan behind. This means not only a significant chunk of the labour force will retire from work but it also means that a growing population of dependents will lead to contraction of the Chinese economy.

Further complicating the problem are the already debt-ridden local governments which will be forced to draw up an elaborate pension plan to support its increasingly older population. Unlike Japan that grew rich before it got old, experts are saying that China hasn’t yet achieved a satisfactory income level to support an elderly population that large. Needless to say that it is staring at a crisis in the subsequent decades.

Amidst all this, the grand strategy proposed by Xi Jinping is to steer China towards advanced manufacturing and use technology, especially automation, to keep the economic machinery running. So unlike the usual understanding of the term ‘reform’ which means greater trade liberalisation, Jinping’s thrust on reforms means a ‘high quality development’ led by heavy investments in advanced technologies. Just like India has a Make in India programme, China has also launched a ‘Made in China 2025’ program that seeks to propel the country from manufacturer of basic goods to high-tech offerings.

However, there is a catch. Unlike the world buying basic goods from China all these years, there isn’t much enthusiasm towards the advanced tech products that China has to offer. Case in point are its much cheaper electric vehicles which China is ready to push into global markets. But the European Union, a considerably large market, is already mulling tariffs to block it. Even the United States as well as India are going to follow suit and impose duties to prevent dumping of cheap EVs or their batteries.

At a time when domestic demand is only going to decrease with an aging population, the Chinese hope of capturing foreign markets also seems like a precarious option. China’s bad boy behaviour in the last decade in the form of multiple violations across the Line of Actual Control is going to deny it one of the largest emerging markets in the world, i.e., India.

India itself is eyeing to gain from the China+1 strategy. This is definitely bad news for China, but for India, the good news is that it will soon replace China as the world’s next growth driver. The Chinese growth story seems to have hit a roadblock now, and it must definitely lead the rulers in China to reflect on their aggressive approach to geopolitics.

The author is a New Delhi-based commentator on geopolitics and foreign policy. She holds a PhD from the Department of International Relations, South Asian University. You may follow her on X: @TrulyMonica. The views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.