National People’s Congress: Three Reasons why China is in Serious Trouble

China’s annual “Two Sessions” opened in Beijing this week. As usual, the Chinese premier announced the annual growth target for the national economy in his work report, which has been set at five per cent for 2024. Given the weakening economy and geopolitical tensions, it is highly uncertain if this ambitious goal will be achieved. But this might be of secondary importance anyway, as China also finds itself in a difficult situation both domestically and internationally, which GDP growth alone can hardly solve.

Each spring, the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC) meet in Beijing in the Great Hall of the People for the “Two Sessions” (lianghui). While the latter is merely a political advisory body, the NPC’s roughly 3,000 delegates constitute parliament of China and have political decision-making power—in theory.

Most of the decision-making has already taken place in advance, guided by the Chinese Communist Party (CCP). Nevertheless, the NPC is worthwhile following, as it includes announcing the five-year-plan, which last happened in 2021, interesting personnel decisions (probably not this time, though) as well as key indicators for economic policy planning, such as the annual GDP growth target. On March 5th, premier Li Qiang announced a target of five per cent for 2024 in his work report.

However, meeting this goal seems rather unlikely, considering current projections—an average of 4.6 per cent—and the overall prospects for 2024: Internally, China’s economic recovery from the pandemic has not been as dynamic as expected.

A range of structural problems that have evolved over the last decades remain largely unsolved. Xi Jinping’s policy campaigns and certain new legislations, such as the anti-espionage law, do not boost investor and consumer confidence either.

Externally, tensions between the U.S. and China are increasing. The wars – against Ukraine and in the Middle East – are putting additional pressure on the international order and the global economy, which have barely recovered from the impacts of the Coronavirus pandemic.

De-risking, i.e. reducing dependencies on critical raw materials and other key inputs as well as restricting the outflow of sensitive technologies to regimes deemed systematic rivals, has become the new mantra of Western nations’ policy approaches towards China, threatening the Chinese development model, which is still reliant on foreign trade and investment.

#1 The primacy of ideology has returned

For more than three decades, China’s policymakers followed a pragmatic and gradual approach to economic development, introducing more and more market-economy elements while keeping a tight grip on political liberalisation. The CCP established itself as an anchor of stability, promising increasing welfare to the Chinese people and substantial benefits to investors, domestic and foreign alike.

The CCP even managed to institutionalise leadership transition, which had been a cause of concern and instability in the past. Ideology-driven campaigns, personality cults and lifelong leadership seemed to be distant reminders of the Mao era.

This changed with Xi Jinping. Xi has concentrated such considerable power on his person that comparisons with Mao Zedong have been repeatedly drawn. In 2018, the term limit for the president was abolished. Xi could – theoretically – hold on to this position for the rest of his life. Freedom of expression, especially opportunities to criticise Xi and his policies, is severely restricted. He has substantially increased the number of loyalists in political key positions.

Generally, loyalty now seems to beat competence and performance in the cadres’ nomenclature. This could impact the quality, efficiency, and sustainability of decision-making. It could also hamper the flow of unbiased information towards Xi. This concentration of power in one person has thus begun to erode the collective decision-making process within the party and set China’s political system on the path from one-party rule to one-person rule.

The result is the return of ideology to nearly every political, economic, and social realm. The study of “Xi Jinping Thought” is not only mandatory for party cadres but has been integrated into the curricula at all levels of education, from primary school to university.

Party cells are to be established in all companies with three or more official party members, whether they are state-owned, private or foreign-owned. Anti-corruption campaigns have increased fear across cadres – of decision-making and of fostering innovation in administration, which an experimental policy approach successfully supported in the past.

The party’s crackdown on big tech, the most innovative and job-generating sector, shows that the regime, or Xi more specifically, will not tolerate other influential big players beside him, even at the cost of a dynamic economy. Political goals are, therefore, highly likely to play a paramount role in China’s future, while economic reasoning might continue to recede into the background. 

#2 China’s economy faces severe structural problems

The primacy of ideology has re-emerged in a period when economic reasoning should play a decisive role: China is facing a real estate crisis, deflation, a lack of domestic consumption, higher (and particularly problematic) youth unemployment, unfavourable demographics, and an increasing hesitance by foreign investors to invest in China.

The real estate sector accounted for about a quarter of China’s GDP in the past and helped to keep growth at a steady level when other sectors floundered. Real estate became a mainstay of Chinese household wealth and debt. Private households are, therefore, extremely vulnerable to price fluctuations in this sector. The concentration of debt in real estate (e.g. real estate giant China Evergrande, whose 300 billion USD in debt caused its liquidation) has now become a particular risk for the Chinese economy.

The real estate crisis is closely linked to the moribund domestic consumption, which the government has been trying to promote for years with limited success. The absence of a reliable social safety net is one important reason. When people see their equity reduced through falling house prices or even lost through homes bought but never built, they decrease their consumption, which negatively impacts production, prices, and economic growth. This is one of the reasons why China has been facing deflation since July 2023.

In addition, youth unemployment, which has become such a big problem that the Chinese government temporarily stopped publishing related data, affects the next generation of consumers. They are likely to reduce spending without a steady job and regular income in sight. While many young people used to find jobs in China’s tech business, the government’s crackdown on private companies has had a negative effect on employment opportunities, entrepreneurship and investment in general.

All this is happening in a society with unfavourable demographics: China’s population is both ageing and shrinking. Population fell by two million in 2023, the second year in a row. This points to severe challenges for China’s overall development, including overstrained social welfare systems, a shrinking workforce as well as a further decrease in consumption and productivity.

Foreign investors, who have contributed to China’s economic rise through the transfer of capital, technology, and know-how, are closely following these developments, which increasingly raise doubts about the attractiveness of the Chinese market. In fact, quite a few of them appear to already have lost faith in China: In the third quarter of 2023, foreign direct investment in China was negative for the first time since 1998.

#3 The political west’s de-risking agenda is here to stay

China still relies to some extent on foreign investment, technology and markets to modernise its industry, move up in global value chains and sell its exports. The Chinese government is well aware of these dependencies. Key policies, such as “Made in China 2025” (introduced in 2015; focus: technological leadership) and “Dual circulation” (introduced in 2020; focus: self-reliance), aim at reducing dependencies and making China itself a leader in key technologies.

This would, in turn, increase the rest of the world’s dependence on China, which it could put to use for achieving key policy goals, such as reshaping the international order to make it more accommodating to Chinese values and interests. China thus followed a “de-risking” approach before the topic entered the political West’s agenda.

However, these policies have started to backfire: western nations are re-adjusting their economic relations with China in response. Already in 2017, the U.S. defined China as their 21st-century strategic key challenge. The EU followed suit in 2019 with its triad of China as “partner, competitor and systemic rival”. A crucial result was the increasing awareness of critical dependencies and their potential to be weaponised to achieve political goals and influence global governance.

China’s closing ranks with Russia and its “pro-Russian neutrality” in the war against Ukraine, together with increasing unrest in the Taiwan Strait, have further fueled geopolitical tensions. This has led to a securitisation of economic relations, as concerns arise that Western exports to and investments in China could contribute to enhancing Chinese military capacities.

The U.S. has already issued restrictive export controls that limit China’s access to advanced semiconductors. Measures related to outbound investment screening and limiting market access for Chinese exports based on its market-distorting state subsidies, e.g., for electric vehicles (EVs), are under discussion. It is also safe to say that the U.S. course towards China will not change—no matter the outcome of the general elections in November 2024.

Against this background, the EU has overhauled its trade defence toolbox, e.g., with a special tool against economic coercion. Even prior to the U.S. taking up the discussion on EVs, the EU announced an anti-subsidies investigation into EV imports from China. The EU also published its first-ever Economic Security Strategy (ESS) in 2023 as a more comprehensive roadmap for de-risking.

The ESS puts a strong focus on better-coordinating export controls on the EU level, mandatory investment screening for inbound foreign investment and deliberation on an outbound investment screening mechanism. Even though the ESS does not mention China explicitly, the strategy’s contents allow the assumption that China is a potential target of related policy measures. Regarding the EU’s upcoming election, one can assume that, similar to the U.S., the new Commission will continue to put a strong focus on de-risking and advancing economic security.

Outlook: Prospects for the coming years look bleak

The Chinese government’s goal of reversing critical dependencies is far from being completed (if this is possible at all), as the political West’s response in the guise of a de-risking agenda puts additional pressure on China’s already battered economy. Restricted access to key technology will contain China’s innovation capacities and technological upgrading, while the potential for limited access to key export markets, such as the U.S. and the EU, could deal a severe blow to China’s exports.

Solving at least some of the tensions with the West, however, would require a fundamental reversal of China’s political course. This, in all likelihood, will not happen in the foreseeable future. The same holds true for re-ideologization, which is inseparably linked with the rule of Xi Jinping.

It is hard to imagine a return to collective leadership, distinct or even competing factions in the CCP and a non-personalized distribution of power – at the current time and probably for as long as Xi stays in office. In the short term, the Chinese government will try to take measures to mitigate the impacts of China’s structural issues and regain investors’ trust.

But their long-term goal of (ideally) replacing the U.S. as a global hegemon will not change. This harbours the risk of continued bloc-building and securitisation of economic relations, leading to increasing fragmentation of the global economy and rising welfare losses—bleak prospects for China – and the world.

About the authors

Cora Jungbluth is a senior expert in the Europe’s Future Program at the Bertelsmann Stiftung. Her research focus is on China, foreign direct investment and international trade (especially the role of emerging economies).

Anika Laudien is Project Manager in the Bertelsmann Stiftung’s Europe’s Future Program. She analyzes the changes taking place in China in order to develop recommendations for German and European policy makers.

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