Remarks to Asia Society: China Has Politics Too

The following is the full text of Asia Society Policy Institute President Kevin Rudd’s prepared remarks, which he delivered in part during an Asia Society virtual discussion on December 9, 2020.
While both America and the world were transfixed by the U.S. presidential election on the 3rd of November, very few people would have noticed that just five days before, China concluded a major meeting of the Central Committee of the Chinese Communist Party which outlined the core of elements of Chinese political and economic strategy for the next 15 years.
The truism is true: our Chinese friends do think in the long-term.
Whereas we in the West find ourselves captured by a combination of the electoral cycle and the news cycle.
It highlights one critical difference between China, the U.S., and the West: notably, the difference between that which is tactical, as opposed to that which is strategic.
It is, of course, natural that the world would focus on who would become the 46th President of the United States. This is not just because of the political theatre that U.S. presidential elections represent. It’s because U.S. domestic politics drives U.S. foreign policy, international economic policy, and strategic posture across the Asia-Pacific region and the world.
And if anyone thought that somehow domestic policy and foreign policy were clinically separate domains, I offer as “Exhibit A” the experience of Donald Trump as the classic counter-proof. Trump’s politics and personality radically impacted American policy toward the world at large.
But just as American domestic politics matter, so too do Chinese domestic politics.
The political systems may be radically different. But the truth is that the internal politics of the Chinese Communist Party also radically impacts the course of Chinese economic policy, foreign policy, and national security policy. And should anyone doubt this proposition, I offer “Exhibit B” as the counter-proof: the impact of Xi Jinping on China’s international posture over the last seven years.
Despite this fact, however, there is a predisposition, both in the United States and elsewhere in the world, to simply take Chinese politics as some sort of “given”. This is a wrong conclusion. Chinese politics is never been static. It is constantly changing, although the patterns of change may be less evident to the untrained eye.
We in the democratic world need to radically lift our understanding of what makes the Chinese Communist Party tick. Perhaps it’s because we are so obsessed with our own politics that we just don’t care. Or we assume that the CCP is monolithic, notwithstanding the fact it now has 92 million members and a multiplicity of factions. Or perhaps it is thought that Chinese statecraft is somehow eternal, somehow detached from the series of bloodbaths and political reversals that have colored the history of the Chinese Communist Party since its founding in 1921. Or maybe we just think it’s all too hard to make sense of Chinese internal politics, that it’s all too impenetrable and even inscrutable.
This mindset must change. China is on course to become the largest economy in the world this decade and is already a peer competitor with the United States militarily in East Asia. And what China now does with its economy, environment, and climate will also deeply shape the world for decades to come.
And all of the above are deeply influenced by the worldview of one man: Xi Jinping.
2020: The Year That Was
Xi Jinping, like China itself, has had a tumultuous year.
For Xi, the year began appallingly with the outbreak of the COVID-19 pandemic in Wuhan and its rapid spread to other parts of the country and then the world.
Xi’s domestic political position came under increasing challenge. He was criticized internally for the failure of the initial efforts to contain the virus on the grounds that local officials were too hesitant to report the truth to central party officials under Xi for fear that they would be punished for being the deliverer of bad news. This was despite the fact that a supposedly “failsafe” system had been established after the SARS pandemic of 2003. This system was meant to immediately report any future coronavirus outbreaks to the centre. Just like the centre had supposedly directed the closure of all Chinese wet markets following the SARS outbreak 17 years ago.
Xi Jinping was also under pressure for a slowing economy. This was not just because of the impact of the virus, which ground most of the economy to a halt in the first quarter of 2020, followed by a creeping recovery during the second quarter. Xi was also criticized for having brought on the trade war with the United States, which had also begun to slow domestic growth. As well as a range of other domestic economic policy settings after 2015 which had gradually eroded private sector confidence, contributing to collapsing private fixed capital investment, and slowing growth.
By the middle of the year, with the world also rounding on China for having “exported” the virus to them, Xi Jinping found himself under considerable domestic pressure.
But, if a week is a long time in politics, 12 months is an eternity.
Because now, fully a year following the outbreak in Wuhan last November or December, the virus has by and large been brought under control across China.
Furthermore, China’s economy in the second half of the year has been recovering rapidly, with annual economic growth likely to be somewhere between 1.5 and 2 percent, compared with the ongoing global recession offshore.
China is now distributing its vaccines to countries across the developing world at a time when the United States still finds itself in comprehensive COVID disarray.
Indeed, from Beijing, America’s political system has been seen as dysfunctional, its economic recovery questionable, and its overall international standing undermined as a consequence of its comprehensive mishandling of the pandemic.
The net effect of all the above is that Xi Jinping, whose domestic political position was in considerable difficulty earlier this year, now finds his position strengthened. And Donald Trump is no longer with us. Well, almost no longer with us.
Xi Jinping’s continued political ascendancy was underlined by the Fifth Plenum Meeting of the Central Chinese Committee which concluded on the 29th of October.
Judging by the Plenum’s outcome, Xi’s political ambition to remain in power for the next 15 years looks increasingly secure.
China also looks to be in a better position to surpass the American economy over the course of the 2020s, accelerated by the rapid pace of the Chinese recovery.
And the 2020s increasingly loom as the decade when Xi Jinping will want to see the realization of reunification with Taiwan. Indeed, in a little noticed op-ed by a senior party official in early November, it was stated that “It may be difficult to achieve the goal of cross-strait unification without using military force”. No one has used that sort of language on Taiwan at senior levels in Chinese politics for more than 40 years.
For these reasons, this decade, the 2020s, looms as the make-or-break decade for the future of Chinese and or American power. Whatever each country may publicly declare as being its strategic objectives in relation to the other, the reality is that deep strategic competition between Washington and Beijing is already well underway.
And the prize at stake is who gets to write the rules of the international order for the rest of the 21st Century – not just in the rarefied world of foreign policy, and not just for the international institutions that form the current rules-based system, but also who gets to set the standards for the new technologies that will drive and, in some cases, dominate our lives for decades to come.
The 2020s therefore will be very much the decade of living dangerously for us all.
Chinese Politics During 2020
The Fifth Plenum of the 19th Central Committee in October 2020 was ostensibly about economics. It was to approve the Party’s formal recommendations for the content of the 14th Five Year Plan, which will be formally considered by the National People’s Congress in March 2021. And while the economic content of the next Five Year Plan is important (as I will elaborate on later in my remarks), the primary significance of the Plenum was politics. It laid the foundation for the 20th Party Conference in November 2022, which will formally determine whether Xi Jinping will become, in effect, leader for life.
What the text of the Plenum communique reveals is that Xi Jinping’s political position has become even further entrenched.
The adulatory language used at the Plenum about Xi Jinping was deeply reminiscent of Mao. Xi was referred to as China’s “core navigator and helmsman”. The last time the word “helmsman” was used to describe a Chinese political leader was in reference to the great helmsman (Weida de Duoshou) Mao Zedong himself at the height of the Cultural Revolution.
Central Committee members also showered Xi Jinping with praise, including Xi’s “major strategic achievement” in the handling of the COVID-19 pandemic.
Most important, however, beyond the public sycophancy towards Xi, was the fact that the Plenum did not nominate a successor. In recent decades it had become “normal” practice for China’s leaders to use the Fifth Plenum of the Central Committee, during their second term in office, to indicate who was most likely to succeed them. For example, under the previous Party General Secretary, Hu Jintao, at the Fifth Plenum of the 17th Committee in 2010, Xi Jinping was appointed Vice Chairman of the Central Military Commission, thereby making it plain to all that he would be inheriting Hu Jintao’s mantle.
No comparable appointments were made during the Fifth Plenum in 2020. It is, therefore, the most formal indication so far that Xi Jinping will seek to remain in office for a third term and probably beyond, thereby finally breaching the convention laid down by Deng Xiaoping that party leaders should only remain in office for two terms, thereby avoiding the problem that arose with Mao is the last 20 years of his career.
Xi Jinping had already paved the way for this change back in 2018 when the National People’s Congress formally amended the constitution to allow the Chinese president to exceed a two-term limit. However, the decision by this Plenum not to appoint a successor to Xi Jinping provides the final formal proof that this is now his clear intention.
Lest there be any doubt on this question, Xi Jinping has also spent a large part of 2020 eliminating any real or imagined political opponents. There have already been a range of purges, imprisonments, arrests, removals or demotions of individuals who have been critical (or at least seen to be critical) of Xi Jinping’s policy course.
Most spectacular among these was the investigation of Vice President Wang Qishan’s former chief of staff, Dong Hong, who had worked closely with Wang for 20 years between 1998 and 2017. This has been a remarkable development. Wang Qishan and Xi Jinping had previously been regarded as close, with Xi entrusting Wang with the leadership of the Party’s anti-corruption campaign between 2013 and 2018. Indeed, Dong Hong worked for Wang in this capacity. Dong’s arrest is a shot across the bows for any potential political challenger to Xi’s authority, including those closest to him.
In June 2020, Xi also launched a new “Party Education and Rectification Campaign” targeting the Party’s legal and security apparatus in particular. Chen Yixin, the Secretary-General of the Party’s Political and Legal Affairs Commission – who oversees China’s law enforcement bodies – was more explicit. In his words, the goal of the campaign is: “pointing the blade inward, to completely remove the cancerous tumors, remove the evil members of the group, and ensure that the political and legal team is absolutely loyal.”
In October, Chen said that the “three month pilot program” of the rectification campaign was ending, but only in order to consolidate so that a “nation-wide rectification can begin next year”. He highlighted that, so far, 373 officials have already been put under formal investigation and 1,040 others disciplined. “Rectification of political and legal teams has entered a critical period of investigation and correction,” he said.
Therefore, during 2021, the year during which preparations for the critical Party Congress of 2022 will be at their most intense, the Party’s internal security apparatus is about to be reminded that Xi Jinping means business.
The series of purges which have occurred across these security-related institutions over the last seven years reflect the fact that Xi Jinping has never believed that this central part of the Chinese Communist Party’s internal machinery was fully under his control. Indeed, in Beijing, it was widely believed that these institutions had been the last redoubt of former General-Secretary Jiang Zemin, despite Jiang having left office in 2002. One of the political hallmarks of Xi Jinping is that he never leaves anything to chance.
As soon as Xi Jinping took power, he conducted widespread purges of the senior leadership of the Peoples Liberation Army with the anti-corruption campaign, replacing them with his own appointments of people he believes to be “absolutely loyal” to his command.
Xi had earlier also brought the People’s Armed Police (China’s massive paramilitary force) under the direct control of the Chinese Communist Party, removing it from the control of the State Council, where it had long enjoyed a level of institutional autonomy.
Finally, Xi Jinping succeeded at the most recent Plenum in promoting six new members of the Central Committee. All six are very much Xi Jinping’s men. These are the Party’s secretaries in Hubei, Zhejiang, Shaanxi, Liaoning, and the governors of Shanghai and Shandong. The promotion of “Xi’s people” has been unfolding rapidly in the six weeks since the Fifth Plenum.
These actions build on a range of measures already implemented by Xi Jinping in his first seven years in office which consolidated more and more political power in his own hands. Xi has been described as “the chairman of everything”. He is personally chairman of all the major leading groups of the Party that in any way deal with significant policy questions. He has also relegated the status of the Premier Li Keqiang and the State Council (China’s cabinet) to a secondary and sometimes peripheral role. Under Xi, power has been relocated to the centre.
This is also consistent with Xi Jinping’s more general assertion of the centrality of the Party’s political and ideological role over the country, the economy, and society at large. The opportunity for any form of policy, let alone political dissent, outside the internal organs of the party, has now been several circumscribed. This now also extends to the universities, civil society, the media, and even international organizations (e.g. the investigation of the most recent president of Interpol, Meng Hongwei).
National Security Prioritized
A further innovation of the recently concluded Party Plenum, and the recommendations for the 14th Five Year Plan which the communique outlines, has been the large-scale expansion of the Party’s security control machinery.
The communique states: “We will improve the centralized, unified, efficient and authoritative national security leadership system…improve national security legislation…and strengthen national security law enforcement.”
Tellingly, the communique also explains that the Party now sees security as the key factor in China’s future development. As it states: “We’ve become increasingly aware that security is the premise of development and development is the guarantee of security.”
This was also visible when Xi hosted a November meeting on crafting new national security directives, when Xi stressed the necessity of achieving “security” in every facet of China’s existence, including “economic security, political security, cultural security, social security, and ecological security.”
Minister of Public Security Zhao Kezhi gave a much more detailed explanation in a long People’s Daily op-ed published on 12 November. “The public security organ,” he said, is the most “important tool of the people’s democratic dictatorship and a ‘knife handle’ in the hands of the Party and the people. Politics is the first attribute and politics is the first requirement.” It was their job to “firmly grasp the eternal root and soul of loyalty to the party,” and to “focus on building and mastering public security organs politically, and to earnestly implement absolute loyalty, absolute purity, and absolute reliability as the only thorough and unconditional political requirements” along with being “absolutely loyal to the CCP Central Committee with Comrade Xi Jinping as the core.” Zhao concluded that would require giving “full play to the role of ‘knife handle’” in order to “resolutely defend the long-term ruling status of the Communist Party of China.”
Xi Jinping’s determination to extend security control across most aspects of Chinese life has also been reinforced by rising geopolitical tensions with the United States. Guo Shengkun, the Politburo member who heads the Party’s Central Political and Legal Affairs Commission, drew an explicit link between the Party’s internal and external security challenges in another article in November 2020. He stated that “we must firmly safeguard the state’s political safety, regime safety, and ideological safety” and “we must defend against and strike hard on sabotage, subversion, and splitism by hostile forces”.
For Xi Jinping, the reality of geopolitical tension with the United States has both fortified and, to some extent, helped justify domestically, his pre-existing determination to assert maximum control over Chinese politics, media, business, academia, and society.
It is important to note that no previous Chinese Five Year Plan document has ever included a section dedicated specifically to national security. That has now changed. Of itself, this underlines China’s worsening external environment, the threat (in Beijing’s mind) now poses to China’s future national development, and the justification, therefore, for the securitization of everything.
A Major Turning Point
As noted earlier in my remarks, the Fifth Plenum is remarkable for what it says about both Chinese politics and economics.
The Plenum celebrates the fact that China has now achieved the first of its twin centenary goals – that is, for China to become “a moderately prosperous society” by the centenary of the establishment of the Chinese Communist Party in 1921.
The second of the centenary goals, scheduled for 2049 on the centenary of the Peoples Republic itself, is for China to achieve the status of a fully developed economy.
Over the last year or two, however, Xi Jinping has been advancing a new intermediary goal of 2035. And for the first time, in the October Plenum document, Xi outlines his blueprint for turning China into a “great modern socialist nation” over the course of the next 15 years. These 2035 goals are defined as:

  • “Modernization to be achieved” in industrialization, agriculture, urbanization, and data;
  • Per capita GDP to reach “the level of other moderately developed countries”;
  • China’s economic, scientific, and technological strength, as well as overall national strength to see a “sharp rise”; and
  • Major breakthroughs in key core technologies to be achieved, with China “entering the forefront of innovative countries.”

The plenum document indicates that Xi now intends to accelerate China’s second centenary goal – of making China into “a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious” by the end of 2049 – to at least majority-completion by 2035.
This was underlined a week before the Plenum by Li Junru, former Vice President of the Central Party School of the Communist Party, who said that Xi believed China’s economic success “allows us to now have a very good foundation for the basic realization of modernization proposed by Deng Xiaoping 15 years ahead of schedule.” He also indicated that the Fifth Plenum would be “a major turning point” for China’s path to modernization.
In 2035, Xi will be 82. This is the same age as Mao at his death. It, therefore, seems Xi is aiming to see his vision realized before his own passing. And quite possibly before the end of his own time in power.
Finally, Xi Jinping’s campaign to continue in office for another three five-year terms, his expansion of Party control across Chinese politics and society, as well as his broadening of the powers of the Party’s national security apparatus, have been reinforced by a parallel campaign to ramp up popular nationalism.
In a strikingly fiery speech on the 23rd of October, Xi used the commemoration of China’s entry into the Korean War to harness Chinese nationalist sentiments against future external threats:

  • Xi quotes Mao calling China’s “victory” in the Korean War against the United States as “a declaration that the Chinese people had stood firm in the East, and an important milestone in the Chinese nation’s march toward the great rejuvenation.”
  • Xi states that the correct lesson from the Korean War was that “Seventy years ago, the imperialist invaders fired upon the doorstep of a new China…that Chinese people understood that you must use the language that invaders can understand – to fight war with war and to stop an invasion with force, earning peace and respect through victory and that the Chinese people will not create trouble but nor are we afraid of trouble, and no matter the difficulties or challenges we face, our legs will not shake and our backs will not bend.”
  • Xi added for effect that: “Once provoked, things will get ugly”, and that China will “never allow any person or any force to violate and split the motherland’s sacred territory…for once such severe circumstances occur, the Chinese people shall deliver a head-on blow.”
  • And finally, in a pointed jab at the U.S., he declared that “Any country and any army, no matter how powerful they used to be” would see their actions “battered” by international sentiment if they stood against China.

Earlier, on the 3rd of September, Xi had spoken at a ceremony commemorating the 75th anniversary of the end of the war against Japan, where he declared the five things the CCP could “never allow”:

  • For anyone to “smear” the Party or its history;
  • For anyone to “deny and vilify” the Party’s achievements;
  • For anyone to “impose their will on China through bullying, or change China’s direction of progress”;
  • Any obstruction of China’s “right to development”; and, most importantly,
  • Any attempt to “separate the CCP from the Chinese people.”

In a new book of previously unpublished Xi speeches released on the 6th of September, titled Discourses on Preventing Risks and Challenges and Responding to Emergencies, Xi also warns of “the treacherous international situation” that China faces, and “an intensifying contest of two ideologies,” with the United States desperate to Westernise and split China as the global balance of power shifts in China’s favor.
To conclude, Chinese domestic politics over the course of 2020 has gone through its own radical cycle: from a leadership that was, in many respects, reeling from the impact of COVID-19 and economic implosion in the first part of the year, to a leadership which by year’s end was committed to the further consolidation of Xi Jinping’s power, and the strengthening of the overall control of the Party.
This does not mean that internal opponents to Xi Jinping’s political, economic, social, and foreign policy measures have disappeared. They have not. But they have been placed in check by Xi Jinping’s superior political craft. As I’ve written many times before, within the brutal politics of the Chinese Communist Party, Xi Jinping is both a master politician and a master Machiavellian. His ability to identify where the next political challenge will come from, and how to prevent it and-or outflank it, has proven to be formidable.
Economic Policy
So, what about the economy? China’s continued economic performance, measured by rising living standards, has been the core determinant of the Party’s political legitimacy in the 44 years since the end of the Cultural Revolution. By 1976, the year that Mao died, the “Gang of Four” was purged and the Cultural Revolution ended, the Party’s credibility had been shattered and the country on the verge of bankruptcy.
The centrality of economic growth has been fundamental to the political calculus of Deng Xiaoping, Jiang Zemin, and Hu Jintao. Indeed, it was Deng who warned the party in his famous phrase “only development is the hard truth” (fazhan caishi yingdaoli) that it was time to stop focusing on politics and ideology and start doing the pragmatic economic work necessary to improve the people’s livelihoods since the “very essence of socialism was the liberation and development of the productive systems.” “Most of all,” he warned, “we must be concerned about left-wing deviations” from this pragmatic path.
Since 2015, and particularly since the 19th Party Congress in 2017, Xi Jinping has embarked on a different direction.
Xi has reaffirmed the centrality of politics, Marxist Leninist ideology, and Party control.
This profound change in course was reflected in the turgid ideological clauses buried in the communique of the 19th Party Congress in 2017, reflected in the Party’s formal redefinition (deploying arcane Marxist-Leninist phraseology) of the Party’s “central contradiction”. Equality, not just unrestrained economic development, was now Xi Jinping’s new mantra.
Prior to the COVID-19 crisis, China’s economic growth trajectory was already under pressure across a number of fronts. Xi Jinping’s domestic economic policy settings had become less market-oriented, less private sector friendly, and more embracing of the traditional powers of China’s previously embattled state-owned enterprise sector.
Over the course of 2016, 2017, and 2018, these changes had begun to generate a negative effect on private business confidence. Indeed, private fixed capital investment growth began to fall for the first time in decades. This in turn flowed through to a softening in China’s overall economic growth numbers.
Second, there was the additional impact of the trade war on the Chinese economy, particularly on China’s manufacturing exporters, who had grown dependent on the American consumer market. There was, in addition, the interruption of China’s global supply chains once the trade war began to morph into the “tech war” during 2019 and 2020.
Third, there was then the impact of the COVID-19 crisis itself on China’s domestic economic growth, compounded by the COVID-induced global recession which further impacted Chinese exports.
Restoring Economic Growth
The challenge for Xi Jinping and his senior economic leadership in 2020, therefore, was to craft a strategy for dealing with the immediate economic crisis they faced, while also developing a long-term approach for China’s economic development through the 2020s and into the 2030s.
On the immediate challenge to restore growth, sustain employment, and support China’s traumatized small business sector, the Party resorted to a combination of fiscal and monetary policy stimulus. Here, the balancing act has been difficult – between providing sufficient stimulus to sustain growth, while not repeating the mistakes of the previous stimulus strategy adopted during the 2008 global financial crisis, which created a series of asset bubbles, adding to private and public sector debt levels and compounding systemic financial risks to the economy as a whole.
The jury is still out as to whether China has got this balance right in 2020. Superficially, China’s positive economic growth of 1.5 to 2 percent for 2020 point to policy success, compared with the negative growth performance of most of the rest of the developed and developing world.
But on closer examination of the numbers, particularly China’s national accounts data which analyze the internal drivers of growth, it’s clear China’s 2020 economic recovery has been built on the basis of public investment (based on borrowing) rather than a rejuvenated private sector.
In the medium-to-long term, this may prove to be problematic given that, pre-crisis, 60 percent of China’s GDP was generated by the private sector – not to mention all of China’s employment growth.
Furthermore, with China’s pre-COVID debt-to-GDP ratio already standing at a staggering 310 percent, the continuing challenge of systemic financial risk looms large for China’s economic and financial policy establishment.
Much more problematic, however, for the medium-to-long term future of the Chinese economy, has been the stalled nature of China’s economic reform program over the last seven years.
With the exception of some elements of financial system reform, most of the other components of the much-trumpeted 2013 market reform blueprint have not been implemented.
This has been particularly problematic in the area of competition policy and the continued privileged position of Chinese state-owned enterprises against domestic or foreign private firms.
Xi Jinping’s “Dual Circulation Economy”
This is the background to the party Plenum’s consideration of China’s economic policy settings for the upcoming Five Year Plan, encompassing the period between 2021 to 2025.
The Plenum’s major economic policy “innovation” has been the formal confirmation of Xi Jinping’s so called “Dual Circulation Economy”.
In essence, this strategy calls for increasing China’s economic reliance on its own massive domestic market by ramping up consumer demand (internal circulation), while rebalancing China’s global economic engagement from a mass export-orientated model to a model prioritizing imports and only high-value chain exports (external circulation).
It is, in part, a reversal of the “great international circulation” strategy adopted by Deng Xiaoping in the 1990s to power China’s rise under the general strategy of “reform and opening.”
Xi’s Dual Circulation strategy is fundamentally a bid to make China’s economy more resilient to external shocks brought on by geostrategic turmoil as the “world undergoes profound changes unseen in a century” (shijie chuyu bainian wei you zhi da bianju) – an assessment Xi first made in 2018 and now regularly uses to describe the global situation.
The Fifth Plenum communique directly echoed this belief, stating that “today’s world is experiencing a great change not seen in a hundred years,” and that “the balance of international power has been profoundly adjusted.”
In July, Xi warned his Politburo colleagues that China’s overall economic situation was “complex and severe,” and that “the many problems we face” were like “fighting a protracted war.” Winning this protracted war would require “the formation of a new development pattern” based on Dual Circulation. The Plenum echoed this language and called on the party to “maintain strategic resolve” during a “protracted battle.”
The next five year plan, therefore, reflects the strategic conclusions of Xi and senior leadership about a difficult and increasingly hostile global environment for China, accelerated by the COVID-19 pandemic and China’s response to it. While Dual Circulation is in part a slogan reiterating some long-standing Chinese intentions on economic reform – rebalancing the economy towards consumer demand; improving market efficiency and progressing with measured financial opening; encouraging “indigenous innovation” and entrepreneurship – it is also an acceleration of those commitments based on a shifting geopolitical calculus.
Most importantly, Dual Circulation reflects Beijing’s conclusions about the future of a U.S.-China relationship they view as now potentially in a state of terminal collapse – where strategic competition is now “hard-baked.”
With the U.S. now determined, in Beijing’s view, to do whatever it takes to hold China down and maintain American economic, technological, and military hegemony, the Dual Circulation model attempts to adapt China to a new world where U.S.-China decoupling now seems (at least in part) inevitable.
In this world, China’s vast internal market can, in Xi’s vision, not only drive “self-sufficient” economic growth, but become what he has called a “huge gravitational field attracting international commodity and factor resources” that forces the rest of the world to engage with China on Beijing’s own terms, or else fall behind commercially.
This means that Dual Circulation isn’t exactly a plan to close China’s doors or end “reform and opening” altogether, as China remains as eager for foreign money as ever.
Liu He, China’s economic and finance czar, who has led the drafting of the 14th Five-Year Plan for Xi, has been careful not to scare off foreign investors.
On the 25th of November, Liu wrote an op-ed in the People’s Daily pledging that Beijing was “by no means trying to close itself up or to achieve total self-sufficiency” through its Dual Circulation strategy, although China would, at the same time, rely on its large domestic market to attract “global commodity and resource” inflows, which it would use to forge new “competitive advantages” internationally.
Indeed, in recent months China has taken significant steps to further open the financial sector to full foreign ownership among a series of reforms designed to continue attracting foreign firms into China.
China is also increasingly confident in the international trade environment.
Feeling emboldened by the long-awaited signing of RCEP, Xi Jinping is already sharing his thoughts about next steps on trade. In his recent speech at the China International Import Expo in Shanghai, Xi said that China will “speed up negotiations on a China-EU investment treaty and a China-Japan-ROK free trade agreement,” as well as “take an active part in WTO reform.”
On 20 November, Xi Jinping also addressed APEC, celebrating the signing of RCEP agreement and then making a surprise announcement that China would consider joining the CPTPP agreement as well.
Notwithstanding Xi Jinping’s assurances that his new concept of a “Dual Circulation Economy” does not mean de-globalisation, the end of “opening and reform”, or a new form of protectionism, the bottom line is that permeating each and every one of the plenum documents, including a series of authoritative statements both prior to and subsequent to the party conference, the political message of national self-reliance remains dominant.
Here the hand of Xi Jinping seems clear in the drafting. Xi is concerned about a future Chinese economy which is too exposed to the global economy (and the fluctuations in global demand which come from that); too exposed to the possibility of future trade wars (stung by the humiliation he suffered at America’s hands in the conclusion of the “phase one” trade deal in January 2020); too exposed to the political interruption of China’s global supply chains (brought home acutely by the American-led bans on Huawei and future threats on semiconductors and artificial intelligence); and too exposed to the long term risk of U.S. dollar-denominated financial sanctions.
The U.S. and the West need to understand fully that this Plenum communique represents a potential policy watershed for the future. “National self-reliance” does in fact run the real risk of becoming a new form of protectionism. Just as the concept of a “dual circulation economy” may well come to mean globalization with increasingly Chinese characteristics.
National Technology Policy
Xi Jinping’s political and psychological predisposition to move increasingly towards national self-reliance is best reflected in the Plenum’s enunciation of technology policy.
The ongoing U.S.-China “tech war” has revealed a number of areas in which China faces critical shortcomings in its supply chains, technological know-how, and manufacturing capacities – such as semiconductors – that Xi is now determined to overcome.
In a national effort to fill in these shortcomings (duan ban) in the Chinese system, and indeed to attain a world-leading position in key technologies and global technology standards, Xi’s 15-year plan adopted at the Plenum makes China’s self-reliance in technology into a national strategic pillar.
The substance of this goal was laid out in greater detail in a major science and technology plan released just ahead of the Plenum that includes incredibly ambitious targets for 2035.
The “strategic emerging industries” plan identifies eight areas in which to pour investment: 5G network applications; biotech and vaccine development; high-end manufacturing; new materials for aerospace and chip making; new energy technologies; green technologies and equipment; smart and new energy vehicles; and creative digital businesses.
The strategy aims to build “10 strategic emerging industrial bases with global influence, 100 strategic emerging industrial clusters with international competitiveness, and 1,000 strategic emerging industrial ecosystems with unique advantages.”
Without using the name, the plan is a clear update to “Made in China 2025,” but is now even more detailed and targeted, identifying not only the general areas to be invested in, but also naming specific products that China must develop, such as semiconductors, industrial robots, and advanced machine tools.
In all of this, China’s State-owned enterprises are given a leading role. The plan is a bid to make full use of what Xi calls China’s “new-type national system” (xinxing juguo tizhi), which channels China’s state-backed technological development capabilities to boost economic performance and comprehensive national power, along with social stability.
Therefore, whatever hopes U.S. trade negotiators had for some sort of “Phase Two” deal with China on the impact of state subsidies on Chinese corporations in both the national and international marketplace, China’s new technology policy sounds the death knell to that.
In fact, we’ve undergone something of a 360 degree evolution in the last several years. American and European attacks on the “Made in China 2025” strategy in 2018 caused the Chinese leadership to remove all reference to the strategy from Chinese government websites. It was then, presumably, to be the subject of Phase Two negotiations between the Chinese and the Americans following the signature of the Phase One deal at the White House in January 2020. Now, however, the listing of Huawei, as well as a number of other Chinese high technology companies, has caused the Chinese to come full circle and to re-embrace with a vengeance their pre-existing state technology strategy.
China’s Currency Strategy
Although not dealt with in detail in the Plenum communique, China’s new approach to national self-reliance also extends to its currency strategy. China’s interest on this score, as noted previously, is to reduce its exposure to the risk of U.S. denominated financial sanctions in the future. This, Beijing has concluded, is a growing risk given the structural deterioration in the U.S.-China geopolitical relationship.
We have seen an increasingly concerted effort to advance the internationalization of the RMB, with the People’s Bank of China (PBOC) Governor Yi Gang pledging ahead of the Plenum that promoting broader use of the RMB will continue hand-in-hand with the opening of markets.
This has included Beijing allowing the currency to strengthen to its highest level against the dollar in decades as the emphasis on the centrality of exports to China’s economy declines.
Beijing has also accelerated efforts to develop and implement a pilot digital currency, backed by PBOC, with the goal of deploying that digital yuan for cross-border field testing by the 2022 Winter Olympics.
Both efforts reflect not just a return of confidence in China’s economic performance coming out of the pandemic, but a willingness to challenge, over time, the U.S. dollar’s long-dominant status as the world’s reserve currency.
Given China’s growing dominance of the global digital commerce market, the deployment of the digital RMB is likely to also grow.
This is particularly the case across the developing world. Chinese officials are privately discussing the desirability of the digital RMB becoming the reserve currency of choice among emerging economies by the end of the decade.
It will, nonetheless, be some time yet before the Chinese government will be prepared to cross the financial Rubicon by fully floating the Yuan and liberalizing China’s capital account. And until that happens, China’s efforts to circumvent the dollar will remain limited. The key question for China will be at what stage will the sheer size of Chinese capital markets be enough to outweigh the residual fears of Chinese leaders that currency market liberalization could be manipulated for geopolitical purposes.
Impact on the Chinese Private Sector
As noted already in these remarks, a range of economic policy measures under Xi Jinping’s administration over several years have cast a pall over business confidence levels for the Chinese private sector.
Beyond pure economic policy, there has also been a clear political agenda on Xi Jinping’s part to bring China’s rambunctious private sector under greater Party control.
In the past, this has been reflected in the administration of national credit policy (which by and large preference the state owned sector) competition policy against SOEs; the enhanced role of party secretaries in the management structure of private firms; and more recently Xi Jinping’s much vaunted “mixed economy model”, code language for SOEs taking equity in private firms, or private firms being required to purchase or take equity in non-performing SOEs.
As noted already in these remarks, a range of economic policy measures under Xi Jinping’s administration over several years have cast a pall over business confidence levels for the Chinese private sector.
Beyond pure economic policy, there has also been a clear political agenda on Xi Jinping’s part to bring China’s rambunctious private sector under greater Party control.
In the past, this has been reflected in the administration of national credit policy (which by and large preference the state owned sector) competition policy against SOEs; the enhanced role of party secretaries in the management structure of private firms; and more recently Xi Jinping’s much vaunted “mixed economy model”, code language for SOEs taking equity in private firms, or private firms being required to purchase or take equity in non-performing SOEs.
A Turning Point in Chinese Economic Reform
With the formal endorsement of Xi Jinping’s Dual Economy model, the full throated embrace of national self-reliance, the launching of China’s “new type national system” in technology development, as well as the recent unhappy experience of Ant Financial, the question arises as to whether 2020 represents a deep turning point in China’s overall economic policy settings since the launch of reform and opening 42 years ago.
The jury is still out. The political assurances from China’s leadership have come thick and fast that this is not the case. Indeed, the leadership had promised further liberalization of the Chinese financial sector (Ant aside, it seems) and that the market, rather than the state, will play the dominant role in China’s economic future.
Skepticism, however, is mounting. Analysts will be awaiting fresh evidence during the course of 2021 to establish the economic reality on the ground.
Conclusion
This speech did not set out to address China’s likely overall strategy towards the Biden administration, although it has dealt with that in one small part.
Nor have I set out to deal with the Biden administration’s likely strategy towards China, including what would, in my judgment, be its most desirable content and form.
Nor have I, at this stage, sought to address the implications of all of the above on third countries like Japan, the Republic of Korea, ASEAN, India, Australia, Canada, Europe – and the developing world more generally.
These are critical subjects to be addressed on a different occasion, although many fine scholars, analysts, and former officials have already addressed these questions in recent weeks. Instead, what I’ve sought to do in these remarks is deal with the domestic political and economic drivers of Chinese international policy.
I believe that it’s critical that we are clearheaded about these factors. Because, if we are not, it is likely to distort our analysis on the broader strategic questions arising from U.S.-China relations and its impact on the future international order.
The conclusion I have reached to date, based on the evidence that has emerged during the course of 2020, is that Xi Jinping’s China continues to move towards the left on politics, partially to the left on the economy, while also becoming progressively more nationalist.
That does not mean that it will therefore be impossible for the rest of the world to have a productive relationship with such a China in the future.
What it does mean, however, is that the China of the future is increasingly different from the China of the pre-Xi Jinping past.
On the core question of whether Xi Jinping’s core domestic political and economic strategy will succeed or fail, unfortunately, I’ve left my crystal ball back in our home in New York. And I won’t be able to retrieve it until I return to Gotham City. Though I hope that will be soon.
Xi Jinping well may prevail, particularly if U.S. strategy continues to fail.
Alternatively, there are many factors still at work within China itself which could cause Xi’s domestic strategy to unravel: a radical polarisation of domestic political opposition as a result of the harshness of the party rectification campaign to be unleashed in 2021; a Chinese private sector which embarks on a private investment strike in response to diminished business confidence; a large scale, system-wide financial crisis, driven by excessive indebtedness and bank and corporate balance sheets that are no longer able to cope; further natural disasters, including a possible repeat coronavirus pandemic, given that these have occurred periodically in China’s recent past; or an unanticipated national security crisis with the United States which erupts into a premature conflict or even war.
Xi Jinping, however, believes that history is on his side. Xi is a Marxist determinist who believes in the twin disciplines of dialectical and historical materialism. For these reasons, he believes that China’s continued rise is inevitable, just as the relative decline of the U.S. and the West is equally inevitable.
The critical variable for the future is what the Biden administration and its friends, partners, and allies around the world now do.
The recent record of U.S. policy has been less than impressive.
But the President-elect has assembled a formidable domestic, economic, and international policy team. They certainly have the intellectual capacity to grasp the complexity of the interrelated challenges (both foreign and domestic) that they face.
The question is whether, as De Tocqueville observed in a previous century, the politics of this curious American democracy, and its permanent predilection for divided government, will accommodate the strategic clarity and resolve that will be necessary for America to prevail.
Ends

Image of Xi: Janne Wittoeck / Flickr (altered)