China grapples between greater national security and economic liberalization

Economy, economy, economy. After the Lunar New Year vacation break, this week China inaugurates the political cycle as the financial front of a recovery process is still not fully framed as the main topic on the agenda. However, there are other underlying factors at work that will determine many of the major geopolitical disputes in this year of global electoral transition. During the annual plenary meeting of the National People’s Congress (the Chinese legislature, which has scant supervisory power and is under the control of the Communist Party), which kicks off on Tuesday, signs are anticipated from the Chinese leadership as to where it seeks to tip the balance in the tense struggle between national security and economic growth and potential stronger responses to the inauguration of the new president of Taiwan in May. In addition, indications of the direction of the Asian leader in a world with multiple war scenarios are also expected.

On Tuesday, during the opening day of the Assembly, which convenes around 3,000 delegates, China is expected to announce the growth target for 2024, which is a strong indicator of how Beijing views the economic landscape. The Defense budget, which has steadily grown in recent years (7.2% in 2023) as the country looks to modernize and strengthen its Armed Forces, one of the cornerstones of the “new era” envisioned by President Xi Jinping and a source of tension with the world’s leading superpower, the United States, will also be discussed, among other things.

At the same time, starting on Monday, meetings of the Chinese People’s Political Consultative Conference will be held. This is a large and varied advisory body with the capacity to propose legislative initiatives, whose members have included actor Jackie Chan and basketball player Yao Ming, among others. The Conference is the other component of what Beijing often refers to as “the two sessions.”

The event serves as a period of reflection on the past year and a conclave of new resolutions for the coming year. It is primarily focused on national content, but it usually sends out signals that should be considered in all areas. Premier Li Qiang, who was elected by the nearly 3,000 delegates last year, will appear before the plenary for the first time to present his labor report on Tuesday. Li, the Communist Party’s number two and Xi’s loyal crony, still retains some of his aura of business-friendly openness. He was tasked with attending the Davos forum in January and spreading the friendly message that China welcomes investment from foreign companies “with open arms” and strives to foster a “market-oriented, law-based” business environment.

His report will give clues as to what room for maneuver there is in the economic arena amid growing state control, which often overrides finances and is causing concern among Western businessmen. Beijing’s track record in this area is both confusing and contradictory. In recent months the country has allowed visa-free entry for a bunch of European countries (including Spain) in order to rekindle trade, which has been stagnant since the pandemic, and to revive the flow of business. However, last week it approved the first reform of the State Secrets law since 2010, whose articles broaden the scope of what is believed to be “work secrets” and may further hinder companies’ access to relevant information for investment purposes. “China’s heightened focus on national security has generated uncertainty for businesses,” Jens Eskelund, president of the European Union Chamber of Commerce in Beijing, reacted immediately.

The move follows a trend that has provided long-standing concerns in a large part of the business community, especially in the West. In 2023, authorities cracked down on consulting firms with overseas ties through raids and arrests linked to counter-espionage measures. The anti-espionage law has been reformed, and the Ministry of State Security, responsible for counterintelligence, has intensified its presence through an active Weibo (the Chinese X) account. It has published everything from a list of reasons that may lead a citizen to be interrogated (“invited to tea,” as they say) by its agents, to a comic book narrating a real espionage investigation (without specifying which one). The heightened pressure reflects President Xi’s speech to the Assembly just over a year ago, when he was unanimously re-elected for a historic third term. He made his priorities clear: “Security is the basis for development, while stability is a prerequisite for prosperity.”

Given that these are Xi’s words, and so recent, few doubt that China will persist in this approach of increased state control. Yet in the opaque world of Chinese politics, every single word will be scrutinized in the coming days in an attempt to get a glimpse of the intentions of the world’s second-largest economic power. Even before the event, Trivium China analysts perceive a shift in priorities in the struggle between stability and security versus development and prosperity. They believe that the Central Financial and Economic Affairs Commission, the Communist Party’s chief economic policy body chaired by Xi, has signaled in a recent article that “security at the expense of everything else, including economic growth, has gone too far,” as they reported in a recent bulletin. The Commission’s article stated: “Only by broadening economic strength (...) will we be able to effectively withstand all types of risks...”

Economic progress is currently one of Beijing’s main causes for concern. In year one of China’s post-covid era, in 2023, the first year after the country’s strict anti-pandemic measures were dropped, the Asian powerhouse’s GDP grew by 5.2%, marginally above the target set by Beijing and well ahead of the EU (0.5%) and the United States (2.5%). Nevertheless, China has continued to show signs of slowdown. The real estate sector remains in the doldrums, consumer confidence is at an all-time low, inflation has been negative for four months, private investments are slumping, the Chinese stock markets of Shanghai, Shenzhen and Hong Kong are posting losses in the millions and youth unemployment reached its zenith in 2023 (until Beijing suspended the publication of the data and reformulated its criteria). This combination of factors also has the potential to become a source of social instability.

A rare public opinion survey in Guangzhou, the southern manufacturing capital, conducted by the Mercator Institute for China Studies (MERICS) think tank, shows that there is growing dissatisfaction among the population regarding the performance of the economy, employment and wages — at its lowest point since 2015. “The failure to implement long-overdue structural reforms to boost welfare and household incomes is beginning to show its effects,” reflects Nis Grünberg, senior analyst at MERICS, in a recent article. “Xi will need to demonstrate that China’s state-driven approach to economic securitization is benefiting the population by introducing a more inclusive redistribution of wealth. If he fails to do so, he will risk further damaging public sentiment.”

One of the issues to keep an eye on is China’s repositioning with regard to Taiwan, perhaps with an increasing wave of military maneuvers around the island to exert pressure before the president-elect Lai Ching-te takes office in May. The Chinese government reacted rather mutedly after the elections, which were won by the candidate who was least favored in the Asian juggernaut, although it stressed that his victory did not reflect the majority feeling of the self-governed island, which Beijing believes to be an inalienable part of its territory. “More assertive” language during the two sessions in the face of secessionist rhetoric “could signal a justification for tougher action,” said Helena Lagarda, also of MERICS, during an online conversation on Friday.

Analysts are also alert to the possible appointment of Liu Jianchao, current director of the International department of the party’s Central Committee, as foreign minister. His name has been bandied about for weeks as a possible replacement. If approved, it would mark a new episode in the political soap opera that began in July with the disappearance of the previous head of the ministry of foreign affairs, Qin Gang, barely half a year after he took office, and continued shortly thereafter with the absence and dismissal of the minister of defense, Li Shangfu. Since then, neither of them has been seen and no official explanation has been provided for their departure. The veteran Wang Yi has assumed the role of minister of foreign affairs since the summer, but several academics believe that his responsibility is likely to be temporary.

In the background, China’s view of the international situation will be on the radar, with the war in Ukraine now in its third year and another war front raging in the Middle East. Less than a week after several Chinese companies were slapped with Western sanctions for their support of the Kremlin’s war effort — a move vehemently denounced by Beijing — China has again sent Li Hui, its special envoy for Eurasian Affairs, on a tour of major European capitals, including the two combatants, Moscow and Kyiv, to sound out solutions to what China still calls a “crisis” or “conflict” but not war. The failure to condemn the invasion, the calculated equidistance leaning towards Russia, with which it shares many interests on international affairs, and the steady increase in trade relations between the two countries continue to represent the main shortcoming between Beijing and Western countries.

However, the sentiment in the Chinese capital is that the Asian powerhouse has kicked off the year of the dragon by avoiding geopolitical turmoil, while trying to regain its lost economic mojo in the eyes of a large part of the international community. At this time the previous year, Washington and Beijing were at each other’s throats over the downing of an alleged Chinese spy balloon over U.S. soil and relations between the two leaders of the international arena plummeted into the void. The agreement signed in November between Xi and his U.S. counterpart, Joe Biden, during their meeting in San Francisco, has allowed each leader to take a breath of fresh air in 2024, by partially putting aside the dispute and focusing on domestic issues: Biden, on the November elections; Xi, on the financial stability that has not yet materialized.

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