In 2012, Xi Jinping promised market forces would play a “decisive” role in economic decision-making. On Wednesday (October 14) in Shenzhen, the Chinese president finally gave the globe a glimpse of what that might look like.
The where of this very, very big story is obvious to any Asia watcher. Forty years ago Shenzhen, a town at the end of the railroad near Hong Kong, became China’s laboratory for trade, industrialization and economic engagement with a fast-changing world.
The Special Economic Zone has, in the decades since, morphed into one of Asia’s alpha-plus megacities, a testament to the thriving success of politically communist China’s flirtation with capitalist economics.
So it made perfect sense for Xi to reaffirm Beijing’s commitment to “opening up and reform” there. And to deputize Shenzhen anew to lead Asia’s biggest economy into a future that is China’s for the taking.
“We need to unswervingly implement an innovation-driven strategy to foster new engines and new trends so as to build a technological innovation high-ground with global influence,” Xi said Wednesday.
Yet Xi has yet to tackle the biggest question. How will he do it?
Xi versus Trump
The when is pretty strongly inferred to be 2025. That year – the year of “Made in China 2025” – is already synonymous with Xi’s ambition for China to dominate the future of artificial intelligence, biotechnology, engineering, renewable energy, self-driving vehicles, semiconductors and software.
Xi’s words seem custom-designed to troll US President Donald Trump, less than three weeks before Americans decide to fire or rehire him on November 3. Xi even seemed to slight Trump, a notorious narcissist, by omission, making only vague references to “many unprecedented challenges” from abroad.
Nothing makes Trump’s head explode more than talk of “Made in China 2025” relegating the US economy to No 2.
After all, Japan had a tough time coming to terms with the fact that China had passed it in gross domestic product (GDP) terms. So just imagine how proud America might respond. Yet the contrast between Xiconomics and Trumponomics has never been more acute than this week.
China is set to grow perhaps 2% this year, while the US is staring at a 1929-like fallout in the face. You would not know that looking at the buoyant Dow Jones Industrial Average, but employment, wages and industrial production are plunging while the US Congress dithers.
America looks even worse as Trump gives 1980s-style trickle-down economics another run. Mostly, that’s meant the Federal Reserve pumping up stocks in the hope a related wealth effect floats all boats.
Trumponomcs, though, is doing zero to restructure a system becoming less and less egalitarian. It’s doing zero to revive a Silicon Valley dynamic that’s lost its drive or to generate jobs on the ground. Trump thought that could lasso jobs back to the US via tariffs and bluster, but so far, it has not.
In Shenzhen, Xiconomics is showing that Trumponomics is doomed. The stand Xi took there is the most audacious and specific rejoinder to Trump’s effort to decouple the US from China.
What’s more, Xi is going right for the economic jugular – right at the technology prowess from which many investors derive the American exceptionalism views that often inform portfolios.
Xi’s Shenzhen project is semiconductor heavy. That’s to be expected as Trump’s White House tries to disappear Huawei Technologies. Yet the breadth of Xi’s ambition here suggests China is playing for keeps as 2025 approaches.
Even if Democratic presidential candidate Joe Biden beats Trump and becomes America’s leader in January, Xi’s course, by way of Shenzhen, is being forged at this very moment.
And it is not being forged in a vacuum as multiple dots are set to connect.
Analyst Michael Hirson at Eurasia Group finds great significance in Xi linking this Shenzhen moment to the rolling out of the People’s Bank of China’s digital currency, perhaps before the year’s end.
Officially, the idea of distributing digital yuan to about 50,000 people is aimed at experimentation and boosting domestic consumption. What, though, would keep the US Treasury Department up at night more than this broadside against the dollar?
Xi can be a taciturn speaker, requiring lots of linguistic investigation after the fact. In Shenzhen, he made abundantly clear what’s at stake.
He is even showing a willingness to ease up on property rights and protections for entrepreneurs.
Looking back, Xi praised Shenzhen for “achieving miracles” already. Looking forward, he declared the city “must carry out development with the courage to break ground and strive to be the first” yet again.
“We are on the cusp of unprecedented changes in this century, and we must take a path towards self-reliance, and this means we must become independent in our innovation drive,” Xi said.
He urged his countrymen and women “to appreciate the strategic intent of the central government, and pick your position correctly so you can make your contribution as we build our country into a strong, prosperous, and modernized country.”
In other words, China is stepping into a global stakeholder role, not only a shareholder one – and the nation’s nearly 1.4 billion citizens had better get with the program.
Investors jumped ahead of Xi’s masses. Stocks raced higher, propelling the CSI 300 Index into the neighborhood of five-year highs.
Grand dreams for the Greater Bay
More interesting, though, is what Xi plans to do with the neighborhood. Wednesday marked Xi’s most explicit bet on the so-called “Greater Bay Area” as the vanguard of China’s bid to become Silicon Valley East.
Japan had something similar with a Tokyo Bay scheme, although many Japanese have never heard of it. South Korea enjoys waves of startup boom optimism.
Xi is putting the Communist Party’s full force, resources and, yes, legitimacy behind this project, one promising to pivot China from smokestack industries to higher-quality manufacturing and disruptive innovation.
The core of Xi’s Bay Area dream is tying former colonies Hong Kong and Macau ever-more tightly to mainland powerhouse cities Guangzhou, Zhuhai, Foshan, Huizhou, Dongguan, Zhongshan, Jiangmen and Zhaoqing. The end result, he hopes, will be a massive, world-beating economic and business hub.
This gets us back to the how question, one on which Xi remains rather vague.
The reason this step could be so important is it’s Xi’s first real effort to put the proverbial horse before the cart. Since 2012, Xi’s men have tended to over-promise and under-deliver reform-wise.
Under Xi, China has opened equity markets ever wider to overseas investors. He’s done the same with government bonds, which next year will be added to a third global index.
Trouble is, access to exchanges in Shanghai and Shenzhen often outpace the domestic reforms needed to ready China Inc. for the global prime time.
China, as is often said, is working from its own playbook, one that even detractors have to grudgingly admit is working. Myriad times since 1997, analysts, investors and shortsellers have predicted a credit-and-debt-fueled crash. It has yet to arrive.
Even so, there are certain laws of gravity that still apply to economies transitioning from state-driven and export-led growth to services, innovation and domestic consumption.
One of those laws states that developing economies should build credible and trusted markets before trillions of dollars of outside capital arrive.
This means regulators should steadily increase transparency, ensure companies raise their corporate governance games, craft reliable surveillance mechanisms – like reliable credit rating players – and strengthen the plumbing of the system before the world shows up.
In this kind of environment, an aggressive and unfettered media is an ally in policing inefficiencies and malfeasances that hurt trust.
But on Xi’s watch, China has in many ways become more of a black box – certainly in terms of press freedom, or the ability of a programmer in Shenzhen or an art student in Beijing to use internet search engines effectively.
And this is the problem facing Xiconomics: It has tended to go in the other direction. The belief is that China can build a world-class financial system after waves of foreign capital arrive.
That is not to say there have been no improvements. The first steps in genuine transparency came from China’s 2016 inclusion in the International Monetary Fund’s top-five currency club. Another step came in 2018 with the inclusion of mainland stocks in the MSCI indexes and in bond benchmarks since.
But Xi’s new, super Shenzhen is a bigger deal. It means, effectively, that his reform legacy is on the clock.
His Shenzhen rejoinder comes at a demanding moment. Between a trade war Trump could intensify at any moment to a pandemic-driven global downturn hurting the export engine, now is a uniquely challenging time for China to close its technology gap with the West.
Xi has tried to thread that needle with a “dual-circulation” model of stronger domestic demand complemented by opening China to more overseas technology, investment and, ultimately, influence.
But the world will be watching to make sure Xi’s China really is prioritizing growth quality over growth quantity. Whether it really is championing “self-reliance.” And whether Shenzhen is indeed the center of a new innovative universe or simply part of a giant marketing campaign that never quite materializes.
Xi’s rep on the line
Some perspective from out East. Early fans of former Prime Minister Shinzo Abe’s failed reform scheme in Japan can be excused for feeling doubtful.
Yet the future is Xi’s to lose, and Shenzhen his reformist Waterloo. Odds are Xi’s ambition in the Pearl River Delta is no flash in the pan – like Abenomics or Trumponomics.
Xi, says economist Liao Qun of China CITIC Bank International, seems set on “helping lift the Greater Bay Area on par with other developed bay areas in the world.”
And beyond. Beijing still must put some meat on the bones of this grand vision. And Xi’s calls for the “great rejuvenation of the Chinese nation” and “optimizing and upgrading production” aren’t exactly new.
What is new is China’s strongest leader in generations throwing down such a big gauntlet in such a public way at such a pivotal moment.
Will he pull it off? The clock is ticking. For now, hold the presses on the latest batch of world history books.