China’s Two Sessions: Crisis, control and an uncertain future
The annual Two Sessions gathering in Beijing revealed anxiety about the economy and political contradictions – yet bets on technology may turn things around.
In a nutshell
- Chinese leaders juggle caution amid stagnation and faith in recovery
- Xi seeks preserved centralization while cautiously addressing the economy
- Export risks drive a focus on domestic consumption and hi-tech innovation
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The annual Two Sessions gathering in Beijing, which took place in March, was closely watched – and reviews have been mixed. The world’s interest in these meetings of China’s legislature and its top political advisory body stems from the current state of global turmoil. People are hoping that China will not make the already unstable world even more so because of its own problems, but rather that the number-two economic power will help to stabilize the situation.
Domestically, the Two Sessions mark the start of the second half of President Xi Jinping’s third term. The results will determine not only President Xi’s own political career but also the future direction of China as a whole.
Two opposing perspectives in China
In analyzing China’s politics and economy, two opposing perspectives often emerge. One is the assertion that the Chinese Communist Party (CCP) has no desire for political reform and is not willing to conduct major surgery on existing problems to revive its economy. It is precisely because of this conclusion that the coming Xi Jinping era has been labeled the “garbage time of history.”
The term garbage time comes from basketball and refers to the time when the game’s outcome has been decided and the remaining time will not have a decisive impact, however, the two sides still have to play until the end. The economist Ludwig von Mises (1892-1945) used this concept (though not that term) to explain socioeconomic problems of the day: “On the one hand, the operation and development of the society has violated the most basic economic laws; on the other hand, the individuals in it are not able to change at all, and can only watch the society inevitably go to failure.”
China-watchers use this term to describe the country’s politics today because they, too, have lost faith in Beijing’s leaders, yet they are powerless to influence the situation. The other perspective is the opposite of the above and can be characterized as full of confidence. This is especially true among Chinese officials. Some seem to have a religious type of optimism, believing that today’s rulers are creative enough in their policies for China to soon pull itself out of its economic decline.
Political mediocrity and hypocrisy
If one carefully follows the speeches given at the confab, it seems the personal worship of President Xi has reached a new peak. The delegates praised him as if he were an all-knowing saint. It is no less than the idolatry of Mao Zedong in the 1960s.
The message here is clear: China’s top brass is rejecting the methodology of “crossing the river by feeling the stones” that has been used since Deng Xiaoping, who served as the Chinese leader from 1978 to 1989. He advocated giving the bottom tier space to practice before finding a viable model and spreading it across the country. In contrast, President Xi’s government advocates “top-level design.” This approach views complex social and economic management projects as something that can be designed by the leaders, with the lower levels merely carrying out orders from above. In this construct, absolute loyalty is the only choice.
In short, if a political culture reaches a stage where everything is attributed to a single leader, mediocrity and hypocrisy become the hallmarks of the age. Inevitably, many people will then look at the political development of the Xi Jinping era as garbage time.
‘Tell the truth behind closed doors’
However, China’s problems must be viewed from both sides. There is a popular view that the Chinese economy cannot grow without reform of the country’s political system, and so economic garbage time has emerged.
Yet China’s political elites treat the economy differently than they do politics, although the economy does serve political ends. The reliability of Beijing’s official data is sometimes questionable because of the political directives that go into formulating the numbers. Nevertheless, the CCP knows that the so-called “positive energy” stories alone cannot solve the long-term problem of the regime’s legitimacy.
The CCP knows that the so-called ‘positive energy’ stories alone cannot solve the long-term problem of the regime’s legitimacy.
Ultimately, the strongest basis for legitimacy in a contemporary authoritarian society is economic prosperity. The population’s expectations of the economy cannot be fulfilled by official figures alone. The economy touches everyone’s daily life and is something that can be experienced.
For this reason, Beijing’s political elites, in private, do take existing economic problems very seriously. The same is true with President Xi. Inside China, there is an attitude of “shutting the door and telling the truth.” That is to say, on economic issues, the CCP allows experts to speak freely, as long as the discussion remains internal information. However, when it comes to openly speaking to the citizenry and the outside world, the CCP insists that the tone and content should be different.
Economic problems abound
Similar to Japan’s “lost decades” and asset price bubble between 1986 and 1991, China’s current economic situation remains troubling. China has been experiencing an economic downturn and a steep decline in spending power for more than three years in a row due to epidemics and the bursting of the housing bubble, as well as government, corporate and household debt problems. The accelerated demographic aging of the population, weakening consumption and changes in the external environment have affected employment and other aspects of the country’s economy. All of this weighs on the CCP’s legitimacy.
In the spring and summer it will be graduation season, with over 12 million college and university students finishing school and wanting to enter the labor force. But there are not enough job openings. Authorities need to provide more than 30 million jobs to sustain the number of people who are trying to escape poverty.
Since 2021, China’s so-called “flexible employment” has reached more than 200 million people. The actual number is much higher. Flexible employment is synonymous with unstable work and unemployment. According to the Shanghai Finance Bureau, in the first half of 2022, 460,000 companies closed in China, and around 3.1 million self-employed businesses were dissolved. At the same time, China has witnessed a massive wave of closures of small and medium-sized private enterprises – which used to be an important part of social and economic vitality – leading to the loss of many jobs. Simultaneously, companies in various industries, including state-owned enterprises, have also been laying off employees.
Technology as a lifeline
Faced with such tumult, President Xi has decided that the economy is the sole lifeline of the country’s ruling class. In response to this complex predicament, China’s so-called top-level design is to rely on the development of “new quality productive forces” to transform its economy. President Xi’s original plan was to leverage China’s strong manufacturing sector to export its products globally, compensating for the country’s domestic consumption slump and economic downturn.
To this end, Beijing relies on the development of a range of sophisticated technologies, such as artificial intelligence, to facilitate the transformation of existing Chinese companies, making China a leader in the fourth industrial revolution. Even this year, Beijing has not given up on investing heavily in technological and industrial innovations such as biomanufacturing, quantum technology, embodied AI and 6G technology.
Of course, as always with economic transformation, all this is easier said than done. China’s exports to the West face immense challenges, including recent tariff barriers imposed by United States President Donald Trump. Domestically, Beijing’s recent economic policies have failed to boost consumer confidence, and consumption remains weak. Consumer price inflation fell by 0.7 percent year-on-year in February this year, dropping more than economists expected and reversing the price growth of previous months. Three million restaurants closed last year due to the increasingly frugal public.
Attempts to reboot domestic spending
Amid these challenges, China’s elites realized at the Two Sessions that exports are highly uncertain, at least for this year, due to pressure from the Trump administration. It appears they will opt for more aggressive fiscal measures at home to bolster the population’s spending power. In this year’s government work report by Premier Li Qiang, the word “consumption” was mentioned more than 30 times.
Local governments have started to raise minimum income standards to boost domestic demand. For example, the monthly minimum wage in Guangzhou will be raised from 2,300 yuan ($316) to 2,500 yuan, an increase of 8.7 percent, while the part-time hourly minimum wage will be raised from 22.2 yuan to 23.7 yuan, an increase of 6.8 percent. At the same time, the Chinese government has slightly increased pension payments for rural households. Objectively speaking, these steps are tiny improvements. And all the while, companies continue to struggle with layoffs and wage cuts.
Facts & figures
China’s general government revenue and expenditure
Contrary to this reality, officials seem more concerned with the supply side than with improving the demand side. This is why the Chinese government has decided to further promote so-called consumption initiatives, such as “trade-in,” whereby families are given preferential conditions for purchasing new electrical appliances. Of course, there are no official signs so far of any major surgery to the existing social security or healthcare systems, nor of any intention to provide the public with a significant income boost.
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To cope with the economic and export downturns, the government has made certain adjustments in its fiscal policy. Beijing will raise the deficit to 4 percent of gross domestic product (GDP), breaking the customary fiscal deficit limit of 3 percent, which means that the Chinese government will carry out a new round of strong stimulus. At the same time, Beijing has lowered its consumer inflation target for 2025 to around 2 percent, the lowest level in more than 20 years and a departure from its long-standing target of 3 percent.
One important policy adjustment that was actually implemented ahead of the Two Sessions was President Xi’s decision to change his tone by encouraging and recognizing the important role of the private sector in the economy. In the past he did not see this sector as one that could be relied upon, especially politically.
Facts & figures
China’s consolidated fiscal balance is worsening
President Xi’s government understands that the private sector receives only 30 percent of the loans that banks provide to businesses while contributing over 70 percent to science and technological progress. Two-thirds of the nation’s jobs are created by private companies. These companies must be treated well to boost technological development and solve the employment problem. Nevertheless, the latest Two Sessions showed that China’s political elite is still divided on exactly how to manage private enterprises. That is why the draft Private Economy Promotion Law, which the Two Sessions considered, did not pass.
Beyond that, Beijing’s biggest pain point continues to be real estate. Although China’s housing minister has vowed to “resolutely stabilize the property market,” prices are likely to continue falling. This means the already heavy burden on China’s indebted households and developers will become even heavier.
Potential upside around the corner?
One reason China’s economy may not be in true garbage time is that it has not only a large manufacturing sector and a remarkable number of engineers, but also products like DeepSeek, which are created by private companies and lead the way in AI. This opens up new possibilities for upgrading and modernizing industries.
At the same time, China is undergoing a period of digital infrastructure renewal and improvement. So far, this has resulted in the comprehensive development of networks, available computing power and new technology infrastructure. This renewal will likely have varying positive effects in the future, facilitating the transformation and upgrading of many domestic industries.
Scenarios
China is now one of the world’s largest policy testing grounds, and this is especially true for President Xi’s attempts to transform the economy by relying on technology to transform industries. Success or failure depends on how effectively such policy adjustments are implemented and on Beijing’s ability to skillfully manage the disaffection of its citizens, especially its younger population. The authorities must stop the domestic economic decline and adopt a pragmatic, non-wolf-warrior style of diplomacy at the international level if Beijing is to ensure improved exports.
Likely: Xi to succeed in some domestic areas, but exports will remain a risk
A safe estimate is that China is likely to succeed in individual areas of domestic policy during the second half of President Xi’s third term. However, there is much uncertainty in the area of exports.
This year, the U.S. has imposed additional tariffs on Chinese goods of up to 54 percent. The impact of these tariffs is already being felt in China. In January-February this year, China’s exports grew by only 2.3 percent year-on-year, far below market expectations. Assuming a 20 percent increase in the effective tariff rate on Chinese exports to the U.S., experts estimate that this will lead to a drop in China’s GDP of about 0.6 percentage points from 2025-2027, with most of the impact showing up in 2026-2027.
Another problem is that President Trump’s trade war may squash China’s vision of exporting goods made by Chinese companies in third countries (such as Mexico and Vietnam) to the U.S. Plus, if the U.S. removes China’s Permanent Normal Trade Relations (PNTR) status, it would be a big blow to China’s economy and its 5 percent GDP growth target would certainly not be achieved.
Possible: U.S. and China make a deal to stave off declines
Nevertheless, it cannot be excluded that the U.S. reaches a trade deal with China, which could be the best-case scenario for China.
Conclusion
In short, the CCP has made the economy its only basis of legitimacy. Beijing’s temporary inability to get China out of its downward cycle does not directly equate to the Chinese economy being devoid of vitality nor the CCP being entirely incapable of effectively regulating its economic policies.
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