The recently concluded Third Plenum of the Chinese Communist Party (CCP) 20th Central Committee did not produce any major surprises or unexpected policy shifts. Rather, the conclave was mostly an exercise in reiterating policy priorities announced in the last three years.
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There are at least three reasons to doubt that the means currently employed will produce the desired results. The first is that underlying the push into “new quality productive forces” is the belief that supply creates its own demand, that increasing production (naturally) increases consumption. This assumption is quite suspect; the causal relationship probably runs the other way.
Whatever the case, inadequate consideration of where the demand for all the additional supply will come from is already producing quite predictable but unintended consequences: falling prices of electric vehicles and solar panels globally, falling producer prices and the threat of deflation in China, and a backlash in much of the developed world as China’s trade surpluses balloon.
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[...] even if China’s manufacturers are highly competitive and the country’s export growth remains strong, this is insufficient to offset weak domestic demand. This risk is amplified by the forces pushing toward decoupling.
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The second fallacy that Chinese policymakers subscribe to is that their state-dominated, social-engineering approach to industrial policy will continue to work as well as it has in the past. While industrial targeting and subsidies worked well when China was playing catch-up in manufacturing, they are unlikely to work as well when the economy is near, or already at, the technology frontier.
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The third risk is that when policy is driven by ideologically-motivated directives from the top, rather than by market signals, it tends to lurch from one extreme to another. For example, until 2020, Chinese policy toward the consumer internet industry (e.g., e-commerce, gaming, consumer finance) was largely accommodative, if not highly supportive, even though there were already well-known problems with the industry. Suddenly in late 2020, Chinese regulators received the signal from above that the sector’s growth should be crimped. A heavy-handed regulatory crackdown ensued, resulting in an industry that has since lost more than 60 percent of its market capitalization – and shows no sign of recovering.