Xi Jinping’s Three Balancing Acts

Xi Jinping has ruled China for over a decade, but the way he rules it is changing. Xi faces domestic and international environments that are markedly worse than when he took office in 2012. The economy is struggling, confidence is faltering, debt is looming, and strategic competition with the United States and its allies is endangering the future of China’s technological advancement and economic growth.

Many analyses still portray Chinese politics in relatively static terms, as either returning to growth-oriented practicality post-COVID, or as having discarded economic concerns to pursue authoritarian control and geopolitical dominance. But what such takes miss is that policymaking is becoming increasingly volatile, as China’s mounting challenges lead Beijing into deeper swings between the politics of its ideological agenda and the pragmatism of delivering a baseline of economic growth. This volatility will stem mostly from three balancing acts: 1. balancing growth with security in economic policy, 2. balancing diplomatic struggle against U.S. global leadership with avoiding economic decoupling from the West, and 3. balancing competition between different sub-factions in elite politics.

The defining theme of domestic policymaking in Xi’s third term could be the securitization of everything, especially economic policy. Xi’s report to the 20th Party Congress in October 2022—an authoritative policy document in the Communist Party system—said that national security should “permeate every aspect and the whole process” of governance, instructed the Party to “comprehensively strengthen the national security system” by 2035, and added a new section on national security to the report’s usually fixed structure. In May, Xi chaired the first post-congress meeting of his Central National Security Commission, the readout of which declared “the complexity and enormity of the national security issues that we are currently facing” to have “increased significantly.”

The Party leadership’s pro-growth sentiment this year has been undermined by raids of foreign firms, national security bans on Western chips, and amendments to the Anti-Espionage Law that expand its application to businesses. Sources in Beijing also suggest the government is planning to launch a Chinese equivalent to the U.S.’s Committee on Foreign Investment in the United States (CFIUS), which will escalate scrutiny of foreign investors in China.

Xi’s rising focus on security seems driven mainly by a belief that China must reduce its economic and technological dependencies on the United States and its allies in an era of intensifying geopolitical competition. In March, he described Western countries and especially the United States as “implementing comprehensive containment, encirclement, and suppression against China, bringing unprecedentedly severe challenges for China’s development.” This is almost certainly a reference to the sanctions, export controls, and reshoring policies adopted by the Trump and now Biden administrations in Washington.

The official summary of a May meeting of Xi’s Central Financial and Economic Affairs Commission said that Beijing will invest heavily in creating a “modern industrial system” built around manufacturing and innovation. Western high-tech firms will be welcome, but Xi hopes they will help boost China’s “self-reliance” on a “whole-nation system” of homegrown competitors.

The securitization of economic policy is likely to bring clearer Party leadership and stronger intervention in almost all areas of the Chinese economy. Recent years saw an uptick of ideological interventions in specific industries—for example, banning for-profit tutoring to ameliorate educational inequality, restricting video gaming to curb youth Internet addiction, and regulating platform technology companies to limit their market power and political clout.

The sense from Beijing now, by contrast, is more expansive: the Party needs to supervise the whole economy to protect its security. In April, the Central Comprehensively Deepening Reforms Commission (CCDRC), arguably Xi’s most influential policy coordination body, held a meeting whose readout said the Party should determine “for whom to innovate, who should innovate, what to innovate, and how to innovate” by “holistically planning the whole chain of technology innovation.”

Increasingly, firms will be expected to align with policy objectives. Some of this alignment will be coerced, through legislation mandating firms contribute to intelligence or military projects, for example, but the more prevalent mechanism will likely be firms proactively falling into line to avoid the fate of companies caught up in previous rectification campaigns. The CCDRC readout said the Party would “actively encourage and effectively guide private enterprises to participate in major national innovation.” Xi is not anti-business or anti-market, he is simply pro-Party; he wants to better harness private sector activity to advance his goals for the Party-state.

Security is not everything, however, as “development” formally remains ahead of “security” as a priority for Xi’s administration, at least in authoritative Party documents like last year’s congress report. Xi has directed authorities to balance development and security. This signifies that economic growth is still crucial, but he believes greater concessions must be made to safeguard national security. The worry both inside and outside China is that security policies will compound the surprisingly rapid slowdown in China’s post-COVID recovery and hamstring the country’s economic trajectory. Confusion will rise, with Beijing periodically switching its emphasis between growth and security, and Xi’s economic and security teams each vying for the upper hand.

Witness the bewilderment of foreign firms in China right now as local governments appeal for their investments while central authorities stifle the business services essential for such commitments. The continued centralization of power and tightening of policy execution mean that slight shifts in messaging will ripple through the bureaucracy even quicker, more frequently, and more damagingly than before. Uncertainty is already depressing private sector investment, dimming the prospects of the Chinese economy.

Mixed messages about growth and security will hit market confidence, but the biggest issue for business between China and the West is the momentum behind high-tech decoupling in the U.S. alliance system, which will likely be aggravated by Xi’s growing diplomatic pushback against Western global leadership in his third term. Xi helped broker a normalization of relations between Iran and Saudi Arabia, put China forward as a mediating party in any future peace deal between Russia and Ukraine, and offered to play a larger role in Israel-Palestine negotiations. He renewed efforts to promote a multipolar international order through his Global Development Initiative, Global Security Initiative, and Global Civilization Initiative. And he has eschewed provocation by sustaining dialogue with Western leaders, moderating some of the more extreme “wolf warrior” diplomacy, and telling his foreign policy team to improve global narratives about China.

Xi’s diplomatic push to position China as a vital economic partner, a political champion of the developing world, and an indispensable stakeholder in addressing transnational problems such as climate change and public health is partly to counterbalance the rising hostility of the United States and its allies. There is also a strong domestic angle, with Xi looking to shore up his legitimacy at a time of economic difficulty. Many analysts guess that Xi sees unification with Taiwan as a requirement to justify his extended tenure, because it would surpass the accomplishments of past paramount leaders. But another less risky, more rewarding way to do that would be for Xi to become a global leader on par with the U.S. president in his gravitas and his weight in international affairs—something that neither Mao Zedong nor Deng Xiaoping ever really achieved.

Notwithstanding the Biden administration’s desire to stabilize bilateral ties, China’s efforts to project diplomatic influence will probably enhance the perception of threat from Beijing in Washington and, to a lesser degree, in other Western capitals. The U.S. will likely push further policies designed to weaken China’s geo-economic power, particularly if Republicans win the White House in 2024. This could exacerbate Xi’s domestic growth troubles, but he can also invoke Western threats to stoke popular nationalism and highlight the importance of Party unity around his leadership. This dynamic could become a vicious cycle of short-term political gain but longer-term geopolitical pain.

As China’s economic and diplomatic challenges continue to grow, so too does Xi’s grip on the Party. He engineered the retirement of any lingering political rivals at the 20th Party Congress and filled high-ranking posts with loyalists. This situation may seem paradoxical, but what matters for Xi is not winning a popular vote but controlling key instruments of authoritarian power, namely the military, the security services, the anti-corruption apparatus, the personnel department, and the propaganda machinery. On this metric, surrounded by people he chose, Xi’s dominance has never seemed so pronounced.

Yet Xi’s ability to pick his own team does not necessarily mean that his people all get along with each other. The most significant development in Chinese elite politics during the next five years could be the emergence of “sub-factional” rivalry between various clusters of Xi supporters. Xi has assembled a leadership team with representatives from groups of officials who used to work for him in different provinces and rode his coattails into the Party center. This arrangement appears to help Xi ensure that no one else becomes too powerful, as he can play allies off against each other, even though such tactics may come at the expense of stable and predictable policymaking.

Xi is the decisive actor in personnel and policy decisions, but people on the ground suggest that a fierce competition is unfolding behind the scenes between networks of Xi-aligned cadres, especially those connected to him through Zhejiang province and Fujian province. These two sub-factions respectively trace their influence up to Politburo Standing Committee members Li Qiang and Cai Qi. Vice Premier He Lifeng is also a major Fujian powerbroker. Both groups are reportedly trying to maneuver their associates into lower-level positions in key institutions, including the General Office that manages Party business, the Organization Department that oversees personnel, and economic agencies like the National Development and Reform Commission.

Sub-factional jockeying under Xi differs from previous models of factional politics, which helped explain elite contention under Xi’s predecessors. Internal debates over the leadership and vision of the Party boss will be nearly absent, but what may seem like minor differences in policy implementation or ideological emphasis could come to serve as platforms and disguises for political battles between sub-factions. Such power fragmentation would inevitably impact Beijing’s already-weakened governance capacity and hinder the effective realization of central policies.

Xi has tough tasks ahead in his third term: balancing growth with security in economic policy, balancing ambition with restraint in foreign policy, and balancing competing sub-factions in elite politics. The base case outcome of this balancing act is that China will muddle through, continuing to build its national power while falling short of its full economic potential. But in the long term, slowing growth, less predictable governance, and an increasingly hostile external environment, if left unchanged, are making national stagnation more likely than national rejuvenation.