China’s contradictions

China’squinquennial Communist Party congresses are that rare event whereritual and dogma combine with introspection and strategy. The 19thNational Congress, which began on October 18, is no exception.Notwithstandingthe suspense over potential changes in party leadership, whichtypically occur at the end of the meeting, President Xi Jinping’spolitical report, delivered on the opening day, was a high-impact event.Significantly, it says as much about the Party as it does about Xi. AsAlice Miller, a leading Sinologist at Stanford’s Hoover Institution,emphasises, the report was carefully crafted over a one-year period toconvey the consensus of the Party’s highest organ, the 205-memberCentral Committee.Three conclusions from Xi’s address areparticularly important. For starters, the ideological underpinnings of“Xi Jinping Thought” have been raised to the same lofty level as thoseof “Mao Zedong Thought,” effectively elevating Xi over his threepredecessors – Hu Jintao, Jiang Zemin, and even the revered DengXiaoping. Much has been written about Xi’s consolidation of power sincehe was appointed General Secretary in November 2012. But this elevationmakes it official. After only five years in office, the Party leadershiphas anointed Xi as one of modern China’s two greatest historic figures.Second,the political report speaks with great confidence about a China thathas now entered a “New Era.” But by underscoring the Chinese adage thatthe “…last leg of a journey just marks the halfway point,” Xi sketchedan even more ambitious future.China’s sights are now set on twogoals – completing the task of building the so-called moderatelyprosperous society by 2035, and then establishing its position as aGreat Power by 2050. Unlike China’s goal-setting exercises in the past,there are no quantitative targets attached to these “twin centenarygoals” (which roughly align with the Party’s founding in 1921 and theestablishment of the People’s Republic of China in 1949). They celebratethe long-awaited national rejuvenation that Xi has dubbed the ChinaDream.The third point is perhaps the most intriguing. This iscouched in the form of China’s “principal contradiction” – a Marxistconcept that serves as an admission of a fundamental problem requiringresolution. The principal contradiction, while typically elliptical andambiguous, frames a rich discussion of risks and opportunities, strategyand tactics, reforms and governance – all of which will shape China’sprospects for the foreseeable future.The big news is that, underXi’s leadership, the party has revised its principal contradiction forthe first time since 1981. Whereas the contradiction had previously beenframed as a tradeoff between the needs of the people and China’s“backward social production,” it is now viewed as a tension between“unbalanced and inadequate development” and the “people’s ever-growingneeds for a better life.”This restatement of the principalcontradiction has not emerged from thin air. It clearly signals afar-reaching change in national perspective – from that of a poordeveloping country to that of an increasingly prosperous society focusedon becoming a Great Power. It is also consistent with the critique offormer Premier Wen Jiabao, who in March 2007 famously warned of aChinese economy that was becoming increasingly “unstable, unbalanced,unco-ordinated, and [ultimately] unsustainable.”Over the past tenyears, two five-year plans – the 12th, enacted in 2011, and the 13th,enacted in 2016 – plus a major set of reforms adopted at the so-calledThird Plenum in 2013, have aimed to resolve China’s persistent andworrisome imbalances. Xi’s political report doesn’t alter the mainthrust of those efforts. The real significance is that rebalancing isnow enshrined within the Party’s ideological underpinnings. It is afoundational pillar of Xi Jinping Thought.The political report’sfocus on China’s principal contradiction also raises important questionsabout what still may be missing from the Party’s long-term strategy.Three “secondary contradictions” are especially striking on the economicfront.First, there is ongoing tension between the role of the stateand that of markets in guiding resource allocation. This was a glaringcontradiction of the 2013 Third Plenum reforms, which focused on theseemingly inconsistent combination of a “decisive role” for markets andsteadfast support for state ownership.The party has long believedthat these two features of economic life are compatible – the so-calledblended economy with Chinese characteristics. Xi’s political reportpraises the mixed ownership model and also aspires to an economy led bygreat firms with unmatched global competitive prowess. But it glossesover the thorny issue of state-owned enterprise reform that may berequired to resolve this contradiction and avoid the Japanese “zombie”problem of a chronic debt overhang.Second, there is the tensionbetween supply and demand. Consistent with other recent pronouncementsof senior Chinese officials, the political report leaves little doubtthat supply-side structural reforms are now the highest priority ofeconomic policymakers. The related emphasis on productivity, innovation,pruning excess capacity, and moving up the value chain in manufacturingand services are underscored as key building blocks of this effort.Atthe same time, the report de-emphasises consumer spending and services –now buried deep in the list of priorities for a modernised economy. Yetfocusing on supply without paying equal attention to the foundations ofaggregate demand is a puzzling and potentially worrisome disconnect.Afinal secondary tension can be found in the contrast between the pathand the destination. Notwithstanding all the self-congratulatoryflourishes in Xi’s political report, there is good reason to believethat the Chinese economy is only in the early stages of itslong-heralded structural transformation. Its services sector is growingrapidly, but is still embryonic, accounting for just 52% of GDP. Andhousehold consumption, which is also growing rapidly, is still less than40% of GDP.China may well be on a path to a New Normal or a NewEra. But the final destination remains far down the road, with manycontradictions to be resolved during the journey. – Project Syndicate* Stephen S Roach, a faculty member at Yale University and formerChairman of Morgan Stanley Asia, is the author of Unbalanced: TheCodependency of America and China.