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More than four decades ago, Deng Xiaoping opened China to trade and investment with Western capitalist countries following the death of Mao Zedong. The combination of state ownership and planning with private enterprise and markets transformed the nation into the world’s factory floor, raising the living standards of hundreds of millions of Chinese — and making lots of money for international investors. Under President Xi Jinping, the party is undergoing another shift, with vows to rein in the “disorderly expansion of capital” and promote “common prosperity.” The result has been confusion as investors try to figure out where Xi — having secured a groundbreaking third term as party chief — plans to take the country over the next five years.

1. How did Xi cement his control?

At the party’s once-every-five-years congress in October, Xi installed allies in the Politburo and the even-more elite Standing Committee, while party elders played a diminished role. Li Qiang, who served as Xi’s chief of staff in the eastern province of Zhejiang about 15 years ago, was catapulted to the party’s No. 2 position, putting him in line to become premier despite a lack of any central government experience. The spectacle of Xi’s predecessor, Hu Jintao, being hustled out of the congress’ closing ceremony underscored how much Xi had put his stamp on Chinese politics. The official explanation — that Hu, at 79, had health problems — was plausible. But the official most clearly associated with Hu’s pragmatic, growth-oriented legacy, Hu Chunhua, not only didn’t make it onto the Standing Committee, but was also no longer a member of the Politburo.

2. What concerns investors?

One worry is that with more centralization of decision-making, it could be harder to correct policy mistakes. At the congress, Xi broke with a decades-old system for orderly succession intended to prevent a repeat of Mao’s turbulent, 27-year rule. He also surrounded himself exclusively with close allies and sidelined alternative voices. The congress reinforced fears that Xi would continue his campaign to constrain the private sector. 

3. How has Xi hemmed in the private sector?

At the end of 2020, he torpedoed a massive initial public offering planned by fintech giant Ant Group Co. and launched a regulatory onslaught that has swept through the economy and stock market. Beijing reduced the power of the country’s largest internet and video game companies with new rules and tough fines and moved to slow growth in the mountains of debt accumulated by real estate developers, a massive industry that’s dominated by private-sector firms. A huge business field offering for-profit tutoring to schoolchildren was outlawed entirely. From a peak in February 2021, the total selloff in Chinese equities onshore and in Hong Kong had grown to around $6 trillion by the end of October. The party congress produced another market rout led by international investors. But after securing his grip on power, Xi moved to stabilize the world’s second-biggest economy, which was growing in 2022 at close to its slowest pace in four decades. Over a few days in November he delivered plans aimed at stabilizing the battered property sector and reducing the economic burden of the country’s strict policies to prevent Covid outbreaks.

4. What’s Xi’s philosophy?

At the congress, Xi repeated his mantra that China has entered a “new development phase,” the essence of which is that there’s to be less emphasis on the pace of economic growth and more on its quality. That means growth that’s more evenly distributed, is less energy intensive and more technology-based. Xi didn’t define the level in numerical terms, but economists see Beijing targeting growth rates below 5% for the next decade, slowing from pre-pandemic rates above 6%. The congress came just after the US had unveiled unprecedented sanctions limiting China’s ability to access foreign-made microchips, citing national security. Xi has made clear that “winning the battle” over “core technologies” such as advanced semiconductors will be a priority. Curbing inequality was also emphasized as a continuation of Xi’s “common prosperity” drive. In that vein, China may impose property and inheritance taxes on the wealthy, and financial firms were considering capping executive salaries and deferring bonuses to narrow the pay gap with junior staff.

5. What role does Xi see for the private sector?

Xi vowed to support private business and enhance the role of equity markets in China’s economy, and to open up more sectors to foreign investment. Rather than designing policy around the whims of investors, however, Xi’s vision has markets serving the goals of the party. 

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