China's upcoming party session is unlikely to reverse its economic troubles

In an atmosphere filled with buzz and buzzwords, the Chinese Communist Party (CCP) is preparing to lay out the nation’s economic agenda for the next five years at a closely watched session of the party’s third plenary session in July. But given that China’s economy is struggling with low growth, depressed consumer spending, and a distressed property sector, the party faces widespread doubts that bold solutions will be unveiled.

China’s leaders are signaling a focus on “deepening comprehensive reform,” “people-oriented development,” and unleashing “new quality productive forces,” even if the meaning of these buzzwords is unclear. The expected priorities are technology innovation, fiscal and tax reform, reforms to address inequities between urban and rural areas, green development, balancing between further trade liberalization and expanding domestic demand, and more.

What China urgently needs but seems unlikely to get is a high-level commitment to market liberalization. Over the past decade, the state sector has expanded, and power has been consolidated at the center. National security has been elevated to a priority equal to, if not more important than, economic development.

The emergence of the national security state

The CCP’s Central Committee meets roughly once a year, with the first two plenary sessions (or plenums) usually devoted to leadership and personnel changes. Historically, this has meant that the third plenums are focused on the economic agenda. A few have been associated with major waves of reform, such as the 1978 third plenum that set China on the path of economic liberalization, and the 1993 third plenum rolling out policies to downsize the state-owned enterprise (SOE) sector and strengthen macroeconomic regulation.

At the start of General Secretary Xi Jinping’s first term, the 2013 third plenum called for a further push toward market liberalization, declaring that market forces should play the decisive role in resource allocation. This goal was supported by calls for corporatization of SOEs, development of the private sector, market-based pricing, and opening-up of the financial services industry to both domestic private and foreign investors. But this goal has been set aside since then, in favor of party control, state ownership, and national security, including the emergence of a powerful national security apparatus over the past decade.

The establishment of the Central National Security Commission in late 2013 and the introduction of the “comprehensive national security concept” in 2014 signaled a paradigm shift in China’s approach to the relationship between the economy and security. Since then, the central party-state has been much more active in using the term “economic security” in its policies (figure 1). This has been accompanied by the promulgation of new legislation, including the data security law, the counter-espionage law, and the national security law, and the establishment of a Cyberspace Affairs Commission that has broad authority over the digital economy.

In 2021, when discussing the 14th five-year plan, Xi stressed that “security is a prerequisite for development, and development is a guarantee of security.” His speech at the 20th Party Congress the following year expanded that mandate to include "deep sea,” “polar,” “space,” and “overseas interests” security. A restructuring of the party-state apparatus last spring included stronger centralized control over technology and finance.

The growing emphasis on security and central control has taken its toll on the business environment. Sudden raids on business consultancies last year and the growing practice of not allowing foreign executives to leave China—known as exit bans—have alarmed foreign businesses and shaken investor confidence. Foreign direct investment exited China in 2023 at a speed unseen in decades. Foreign expatriates are departing and wary of making even short visits.

There are some signs of recognition within China that the emphasis on security might have gone too far. Some scholars in China have warned that the government should “continue to focus on economic growth and social development, and avoid falling into the trap of pan-securitization.” Beijing has recently been rolling out a charm offensive to lure back foreign investors. Yet it is proving difficult to overcome an overall atmosphere of apprehension.

Expansion of the state-owned economy

In the meantime, efforts to improve SOE performance through mixed ownership and corporate governance have stagnated, slowing down growth over the last decade. Since 2012, the assets of state nonfinancial firms have risen from RMB 90 trillion to RMB 340 trillion (or from 166 percent of GDP to more than 280 percent). As returns on SOE assets have declined and their ability to use retained earnings to finance additional investment has weakened, they have relied on easy access to bank credit, and as a result, their total liabilities have kept rising (figure 2).

While the state sector expanded, private sector growth weakened, impeding economic growth. The private share of overall business investment dropped from its peak of nearly 60 percent in 2014 to only 50 percent in 2023 (figure 3). The property downturn has contributed to the trend, but private investment has moderated since 2015, before the property downturn began.

Political oversight of the private sector has steadily tightened. The party-state apparatus is promoting its authority through changes in corporate governance and state-led financial instruments such as the “special management share” scheme in private technology and media companies. The largest blow to the private sector was arguably the regulatory crackdown in the summer of 2021, which wiped more than a trillion dollars from the market value of some of China’s most successful private enterprises. The share of private companies among China’s largest publicly traded companies peaked in mid-2021 at 55 percent but dropped to 37 percent by the end of 2023, reflecting the crackdown’s damage.

There are recent signs that Beijing recognizes the need to bolster the private sector. In early 2024, China began work to draft a Private Economy Promotion Law that would codify the equal treatment of private, state-owned, and foreign businesses while protecting the property rights of private entrepreneurs. But skepticism remains, and the draft legislation has been dismissed as “old wine in a new bottle.” Even if the law is passed, as is likely, its implementation will be difficult given long-standing biases in China’s state-owned banks and the enormous influence wielded by SOEs.

For all these reasons, the 2013 plenum’s call for liberalization rings hollow. The inefficiencies and risk aversion in the economy that have built up now require urgent attention. To be sure, Xi has lately stressed the importance of creating high-quality jobs, especially for college graduates. But job creation requires a dynamic private sector and a credible commitment to market-driven growth. Absent a clear shift of strategy, the upcoming third plenum risks fading into inconsequence.

A previous version of this blog post erroneously stated that the authors received an honorarium from the Center for New American Security.