Those of you who have seen the topic for this evening’s lecture may have died of fright. It’s meant to be a genuine rib-tickler: “The Evolution of Chinese Economic Strategy Under Xi Jinping”, subtitle, “On Becoming a Techno-Industrial Superpower by 2035: The Ideology of AI and Xi’s New Quality Productive Forces”.
Now, I can see that’s resonating already with this crowd. There is a certain shimmer of excitement, at least on the part of one or two people that I can see here, if not the rest.
Xi Jinping’s ideological project
Xi Jinping—for those of you who have read his stuff, and I made it my business to read all of his stuff when I, at the tender age of 59, decided to do a DPhil at Oxford and produced a book called On Xi Jinping, having studied for four years his ideological framework—takes ideology seriously, in a country which takes ideology seriously.
If you read Xi Jinping’s ideological framework carefully, my three-line summary of the ideological changes he’s brought about in the Chinese system is as follows.
Number one, Xi Jinping deliberately set about moving the centre of gravity of Chinese politics towards the Leninist left: more power for the Party.
Two, he also took a deliberate decision, probably from the 19th Party Congress in 2017, to move the centre of gravity of Chinese economic policy towards the Marxist left.
And three, throughout this period, we see a parallel shift in China’s approach to its foreign policy and national security policy by moving its centre of gravity towards the nationalist right.
If we are to make sense of the Xi Jinping ideological project, it is reflected in these three dimensions.
People often say to me, here we are in the 21st century: why does ideology matter?
In a Marxist-Leninist system—and certainly in the Chinese political system, of which I have been a student for now 50 years, since I arrived here as a 17-year-old, which makes me about 49 now; I didn’t do maths—ideology matters.
This system in China, from the inception of the Chinese Communist Party in 1921, through to the success of the Chinese Revolution in 1949; through the rigours of the Great Leap Forward and the Cultural Revolution, and the self-inflicted damage occasioned by both of those disasters in modern Chinese history; through to the rise of Deng Xiaoping in the post-Mao period and the heralding of the beginning of the period of reform and opening; through to Xi Jinping today—each of these epochs within Communist Party history, policy and performance has been heralded by shifts in ideology.
Ideology, if I could put it in these terms, constitutes the headwaters of change in a Marxist-Leninist system. It is then translated into policy over time, which in turn is changed into forms of behavioural change within the various instruments of the Chinese Party-state and broader Chinese society.
I think it’s useful, before we begin to look in detail at what’s evolving within Chinese economic policy and technology policy, to understand the ideological frame within which all this rests.
The great rejuvenation and comprehensive national power
As part of the nationalist vision for China, Xi Jinping, upon taking power at the end of 2012 as General Secretary of the Party, and then as President of the country in March 2013, took his colleagues across Tiananmen Square from the Great Hall to the National Museum of China, incorporating what used to be called the Museum of the Chinese Revolution.
He then took them to an exhibition of China’s humiliation at the hands of the British and the French in the Opium Wars. That is where he pronounced for the first time to the Chinese nation his vision for what is called the great rejuvenation of the Chinese nation.
This has been his galvanising nationalist ideological project now for the better part of a decade or more.
In its subsets, it is about this: how does China now move from being a country and an economy which is a middle-income economy—by some measures an upper-middle-income economy, by others a lower-middle-income economy, depending on where you are looking at the geography of the country—and how do we bring China to advanced economic status by the time of the centenary of the founding of the People’s Republic in 2049?
That is his galvanising mission.
If you look, therefore, at the various instruments of policy which have unfolded since then, each relates back to that fundamental nationalist purpose.
When you look at China’s concept of its own national power, in order to give effect to the great rejuvenation of the Chinese nation, power itself is defined by a Chinese concept called comprehensive national power, zōnghé guólì.
If you look at it carefully, it is a concept—or a macro-concept—of power which builds within many, many subdivisions. It is not just classic military power, as in a 19th-century realist view of the state. It is also about economic power, trade power, the power of capital, as well as the power of technology.
It is also about the fundamental underlying resources of the country. It is about how that power is deployed in the world. And comprehensive national power is invariably measured in relative terms against China’s assessment of the power of other states as well—principally the United States of America, but also American allies in the region and the world.
So the Chinese approach to the implementation of this national vision for national rejuvenation is driven by this broad concept of national power, zōnghé guólì, within which the economy looms large. It is not an exclusive measure of power, but it is a dominant measure of power.
From Mao to Deng
This brings us to how China’s economic policy has unfolded in the period since Xi Jinping took office.
When Deng Xiaoping decided to change China’s economic course at what is usually called the Third Plenum of the 11th Central Committee in 1978, he did so in a deliberate and ideological fashion.
Under Mao Zedong, the principal ideological challenge of the Chinese Party and people was to continue class struggle at home and abroad. This gave rise, ultimately, in its most extreme form, to the Cultural Revolution.
But it placed at an absolute premium an equality of classes, and therefore Mao’s determination never to allow the emergence of a bourgeois class in China which would supplant either the proletariat or the ruling working class—or their self-designated representatives, the Chinese Communist Party as the Leninist party.
For Mao, growing the economy, while it may have been a real concept within classical Marxist economics, frankly did not occupy the first slot in his list of priorities. It was always about class struggle. It was always about ensuring that the purity of the revolution, which they had won through blood and effort in 1949 after 28 years of civil war, was preserved as an ideological project.
The problem was, by the time Mao died in 1976, the country was broke.
If you speak to Chinese ministers and leaders at the time about how they financed in hard currency their first travels to the United States, it’s a searing tale, in fact, of how empty the coffers had become by that stage.
And so Deng Xiaoping looked at this. By the time we reach the 12th Party Congress in 1982, he takes Mao’s definition of the core mission of the Party—class struggle—and turns it on its head.
He says that, in the Party’s ideological definition, the fundamental challenge of the Party at this stage in history, since 1982, is to unleash the factors of production in order to give rise to national wealth, and therefore to afford the Chinese people a better living standard and release them from poverty.
If you want to trace the ideological wellspring from which the period of what we loosely call reform and opening came, it is that congress of the Party—the 12th Party Congress—and the resolution it adopted, formally changing the Party’s central mission or, to use Marxist language, the core central contradiction, zhǔyào máodùn, around which the Party would organise its future efforts.
From 1982 to 2017, that remained the central galvanising ideological project of the Chinese Party-state.
As a consequence, over that period of time, you would have seen, with some interruptions, average double-digit growth through the 1980s, the 1990s and into the most recent decade as well. China moved from an economy which, as of the end of the Cultural Revolution, had the same GDP in aggregate size as the Australian economy, to become the second-largest economy in the world.
Xi’s shift towards the Marxist left
When Xi Jinping became leader, he initially embraced this vision. If you look carefully at the Party Congress which brought him to power in 2012, and the resolutions which followed, they embraced this reformist vision: a greater role for markets, both at home and abroad, in unleashing the factors of production and unleashing wealth for the Chinese people; raising living standards; and also growing the economic power of the nation.
Deng Xiaoping saw these and said, “We need to ensure that these, in fact, continue to deliver wealth into the future.” When Xi Jinping looked at these, by the time we got to 2012 and 2013, he said, “Yes, let’s double down further on the market.”
But then something difficult happened within Chinese financial and economic system management around 2015.
For those of you who studied it closely, in 2015 there was a significant domestic financial crisis within China. There was a run on the stock market. There was a panic in the property market. As a consequence, people’s shareholdings lost much of their value.
It was around that time—and remember, we were also existing in the long afterwash of the response to the global financial crisis, and financial markets globally out of control—that you see a deep reappraisal by Xi Jinping of the economic pathway forward.
As a consequence, by the time he got to the 19th Party Congress in 2017, Xi Jinping looked back at the origins of the Deng reform and opening period and readjusted the Party’s ideological mission.
This never makes it into the newspapers. It’s dull ideological news. It’s what theoretical nerds like yours truly trace and examine in order to see where the origins of policy change lie.
If you look carefully at the text and the resolution of the 19th Party Congress, 35 years after the 12th Party Congress back in 1982, what Xi Jinping said was this: Deng Xiaoping said that the central challenge for the Party in the future was to unleash the factors of production to grow wealth for the Chinese people. Xi Jinping said this model of economic growth had become unbalanced and was producing inadequate results.
We might say: what does that mean in real language?
What Xi Jinping was signalling was that the time for the supremacy of the market, in the way in which the Chinese socialist market economy had by that stage been conducted, had come to a close. It was time for the Party, through a rejuvenated Leninist party, to resume direct intervention in the running of the economy.
You begin to see from that stage the dial shifting fundamentally.
If you look at the barometers of change, you see, for example, a rise once again in the centrality of central planning, and a relative decline in the significance attached to market disciplines in themselves.
You see the rehabilitation of state-owned enterprises, as juxtaposed against private-sector corporations which, by that stage, were already being deemed to have become too big—and therefore too large for the Party to control.
And in terms of the income disparities which had been generated over 35 years through the period of reform and opening—when Deng said it is glorious to be rich; when Deng said it’s fine for people to get rich first, and others will then get rich later—Xi Jinping’s response was to say, “We are now heralding a new era of common prosperity”, gòngtóng fùyù.
So the juxtaposition between these parameters of economic policy then became clear. That is why I’ve said in my opening remarks that Xi Jinping deliberately, ideologically, at that congress chose to move the centre of gravity of the Party’s economic policy towards the Marxist left.
Right now, here we are almost 10 years on from that, and we are in the long economic shadow of that ideological decision taken back then.
I will leave to one side the relative impact of COVID, which disrupted everybody’s economy, and most particularly the Chinese economy, given that’s where COVID came from in the first place, in Wuhan.
But if we were to extract the COVID factor from China’s economic performance and ask ourselves what growth has been like in the period since the ideological change, even on the official numbers, average growth has reduced to around 5 per cent from double digits.
Independent economic analysts would say that, in the last five to six years, despite the official figures being registered at around 5 per cent, the real figures are in fact closer to 2 or 3 per cent.
We might say: why is that the case?
The core reason is that you had a fundamental recognition on the part of the private sector that they had to begin to trim their sails. The private sector was no longer going to be allowed to run triumphant across the Chinese economy, as Xi Jinping feared these companies had become too large for the Party itself to control.
You will recall that it was not long after that you saw the largest platform companies—píngtái gōngsī—and a number of their chief executives being hauled in and reprimanded, disciplined and, in some cases, temporarily disappeared, as happened, for example, with Jack Ma from Alibaba.
And the message to the body politic, and the corporate body politic, was this: understand now, my friends in the private sector, you are working within the remit of Party control, as opposed to the previous 35 years, when it was indeed glorious to be rich.
The impact this has therefore had on private-sector behaviour in the period since COVID—and there was evidence of this even prior to COVID, in 2018 and 2019 before COVID broke out in 2020, and certainly once COVID restrictions were lifted by the time we get to 2022 and 2023—is the long afterwash of this deep ideological change in the way in which the Party views the role of the private sector.
The engines of China’s current economic growth
How do we best diagnose it today in terms of the data?
If you were to look today at the most recent data produced on the Chinese economy, both from the official numbers and from the unofficial analyses—which look at different matrices through which you analyse growth—point one: private domestic consumption within the Chinese economy is flat.
And representing such a huge slice of GDP, if you have a flat performance from your domestic consumers, let me tell you, it’s very hard to reconstitute the growth numbers from the other drivers of growth.
The reason for that is that consumers, having been through COVID, but also having seen other things happen in the economy and becoming more cautious about their futures, have now begun saving again at record levels.
Savings ratios in the Chinese economy have gone up, as private domestic consumption numbers have headed in the reverse direction.
So private domestic consumption, a major contributor to economic growth in any economy, either emerging or developed, has now been flat for the better part of half a decade or more.
Second, private fixed-capital investment—a second big driver of growth in most economies—is also flat.
The reason is self-explanatory: the individuals in the private sector I referred to before, who were investing big in their corporate futures in the past, were now receiving different signals from the Party centre about their future.
A third driver of growth, normally in any GDP matrix, is private residential construction. The residential construction sector in China has imploded completely in the last six years and continues to be in recession.
This has had profound flow-on effects for the rest of the economy. First of all, back to the good old consumer: most consumers had put their savings into residential construction, buying their classic investment property, only to see the value of those investment properties collapse—often to zero.
The second consequence of the collapse of the private residential construction sector has been felt through local government finance-raising, local government taxes and local government revenue-raising. This was the sector which generated most local income growth for the state, and therefore you’ve found in recent years that Chinese local governments are often not capable of paying the salaries of their workers.
So the profound implications of the collapse of the private residential construction sector continue to work their way through the Chinese economy today.
What, therefore, against those measures, is working in order to keep growth north of zero?
There are two answers to that.
The first is net exports.
If you look at China’s export performance around the world—in the United States, though that is now declining because of the tariff wall which has been constructed defensively in response to it; in Europe, where at present a tariff wall has been contemplated but not yet executed; and in Southeast Asia—China in the last 12 months has generated a US$1.2 trillion trade surplus with the rest of the world.
This is the most powerful engine room remaining in the Chinese economy today: net exports.
The critique of it that you hear in the United States, Europe and elsewhere is that China, because of suppressed or depressed domestic demand, is maintaining its production levels and, in fact, exporting that at subsidised prices to the rest of the world, thereby disrupting global supply chains and global production, and causing the reverberations we see today in German manufacturing and the loss of jobs in that sector and across industrial Europe.
This, however, is a single driving force in China’s current economic performance.
The other one is investment by the state: public investment in Xi Jinping’s techno-industrial vision for the country’s future.
AI and the techno-industrial strategy
This brings me to the question of how Xi Jinping views his techno-industrial vision for the future.
Artificial intelligence, in the Chinese context—and looking carefully at the way in which it’s reviewed in their ideological and policy literature—is seen as an overwhelming positive for China’s aggregate economic competitiveness and future in the world.
Whereas in this country, and around the democratic world, there is an emerging parallel debate about the risks presented across the spectrum by artificial intelligence—risks to individuals, psychosocial risks, employment risks, the security risks which arise from agents escaping from the sandbox of the type that we have seen most recently—this is not prominent in the Chinese literature.
What is prominent in the Chinese literature describing the AI revolution is how this will turbocharge China’s economic growth into the future.
In Marxist economic theory, the view is that we have four factors of production: land, labour, capital and technology—and now a fifth, as of 2019: data.
There was an early recognition that data of itself becomes a new latent force to drive the economy forward.
With the arrival of artificial intelligence, of course, there is an ability now to harness data for extraordinary economic applications across all industrial sectors.
If you read carefully how Xi Jinping conceives of this, he sees artificial intelligence and the algorithms alive within it, together with other new advanced technologies, as now providing this turbocharging device to lift total factor productivity across the entire economy, in every field of endeavour.
That is why, in large part, they are doubling down on this so hard through this massive campaign of public and publicly directed investment in this sector.
In fact, if you read the literature, they fully recognise, as Marxist economists, that the traditional advantage of liberal capitalist economies in the past has been their relative efficiency in the allocation of resources.
However, they believe they now possess a unique opportunity, as a centralised state, to deploy the new algorithmic powers available within artificial intelligence across the total production spectrum—and not just in goods, but prospectively in services as well.
This brings me to a broader point: why Xi’s literature on what he calls new quality productive forces, driven by artificial intelligence and other advanced technologies, represents for them not just a means by which to catch up with the United States across the AI stack; not just to keep pace with the US and the collective West in terms of where artificial intelligence has reached; but to now “leapfrog” the West, which is the term now used in the literature, and to achieve what is also described as a paradigm shift against Western economic models.
The conundrum faced by Marxist economists since the relatively humourless Adam Smith sat on the docks of Glasgow to observe merchants loading and unloading goods from the North American market—from which he ultimately devised The Wealth of Nations and his theory of price being determined in a marketplace by supply and demand—is that this has been a remarkably efficient allocative mechanism for scarce resources within an economy.
Marxist economists have long recognised this, including in China. In large part, that explained why Deng Xiaoping opened the door to price-based market economics in the period of reform and opening that I’ve described before, between 1982 and 2017.
The invisible hand, as described by Adam Smith, works mysteriously in an economy, allocating resources where there is an accentuation of demand or a problem of the depreciation of supply, and so setting the most efficient price.
This has presented a conundrum for Marxist economists from the very beginning, and for Chinese Marxist economists as well.
But this is where the literature becomes sharp and real in the current debate.
If I read it carefully, what the Party is now saying in its theoretical literature is that, quite apart from increasing total factor productivity within the Chinese economy as a consequence of AI and other advanced technologies, what we are looking at much more broadly across the entire economic paradigm is a superior macro-allocation mechanism for resources within the economy, which will be algorithmically driven.
No more invisible hand of the market. The explicit term now used in the literature—the Chinese Marxist literature, the Chinese ideological literature—is the visible hand of the state.
Therefore, the paradigm shift which is now emerging, in the literature at least, is this: we in socialist China believe that, through the arrival of this enormous change-generating set of forces, of which artificial intelligence is the core, we now have at our disposal for the first time in economic history an alternative to the free market for the efficient allocation of resources.
This is one of the reasons why I believe we should take ideology seriously, because all this is in the ideological literature—not yet in the policy literature and not yet, frankly, adopted by firms, corporations or state entities in the real marketplace.
But, as I said before, my observation of ideological change in China over the last 50 years is that ideological changes occur at the headwaters, and they feed into policy changes and behavioural changes later on.
And that, my friends, is where Xi Jinping’s definition of new quality productive forces, including artificial intelligence, now stands.
First, catching up with the United States and surpassing it in terms of total factor productivity growth, thereby turbocharging China’s current low growth levels into a new level of high growth.
And second, engineering parallel to that a game change—a paradigm shift—in terms of the ultimate economic orthodoxy which distributes resources efficiently within an economy.
The private-sector conundrum
There’s one conundrum, however, which even the ideological literature of the Chinese Communist Party recognises: AI and innovation writ large, across the advanced technologies, are happening primarily, but not exclusively, in the Chinese private sector.
And so therefore, how are we going to square the circle?
We need the innovation, enterprise, expertise and cutting-edge technological skills of this sector on the one hand. But on the other hand, we don’t want to return to the ideology I have just put into the past, which allowed this class of individuals within the country to become ever so powerful.
If I read the literature carefully, that is where the debate within the Party now stands: seeking to square that circle between these competing tensions.
Liu He, in the last Xi Jinping administration, famously said that the Chinese private sector represents more than 70 per cent of technological innovation. It provides more than 80 per cent of urban employment. It also contributes more than 50 per cent of overall Chinese tax revenue.
The ideological, political and policy dilemma faced by the current administration is therefore how to reconcile those tensions: ideology in one corner and, in the other corner, the self-interest of a private sector wishing to maximise profits, whose members will not necessarily find their daily inspiration to get out of bed and invent new things through having read another volume of Xi Jinping Thought.
The bet—and its vulnerabilities
To conclude, the reason why this debate is important, and why I thought of making it the centrepiece of what I said in this lecture this evening, is because where the Chinese economy goes now fundamentally determines the future of Chinese power in the region and the world.
Xi Jinping has made an enormous bet on his techno-industrial strategy.
He has said that this will transform China’s economic paradigm. He has said that it will also lift, in time, China’s presently languishing private domestic consumption within the economy. And he has said that, when the private sector gets on board, it will also contribute to a further generation of fresh growth in private fixed-capital investment.
Thereby, the growth conundrum that he’s confronted over the last decade is changed and solved as a consequence of his betting big on a techno-industrial strategy.
The final point is this: how do you pay for it?
Always an important question in politics. Always an important question in government, wherever you are.
And the answer so far is: we in China can navigate this period ahead on the condition that we continue to harvest a trillion-dollar-plus surplus in our export relations with the rest of the world—in the hope that the rest of the world doesn’t construct tariff walls in response to our subsidised industrial strategy.
So that is vulnerability number one.
Vulnerability number two is the Chinese consumer who, remember I said before, is saving more and more and more, so that the Chinese savings ratio is now reaching levels which we didn’t think were possible anymore.
Because Chinese savers are not investing in the property market anymore—their fingers have been burnt comprehensively—and because the stock market is not seen to be sufficiently stable or predictable in terms of providing a return, these savings are staying in very low-interest-earning deposits in the Chinese banking system.
It is that enormous volume of individual Chinese citizens’ bank deposits which is being drawn upon by the Chinese state, through a series of loan instruments—local, provincial and national—in order to give effect to the techno-industrial strategy that I referred to before.
Is that sustainable over time?
Perhaps. But that’s part of the big bet which Xi Jinping has made.
So how will this turn out? I’m not sure. But I think the beginning of wisdom in our analysis of these things, in Australia and elsewhere in the world, is to understand clearly what China’s strategy is.
