In the last week, the Central Committee of the Chinese Communist Party (CCP) convened and concluded an important political meeting, the consequences of which will take time to assess. The so-called Fourth Plenum’s principal tasks were to approve both the 15th Five Year Plan (FYP, 2026-30), which will be unveiled next March at the National People’s Congress, and key personnel changes. The latter took on an additional frisson in the wake of an expanding purge of the high command of the People’s Liberation Army, with nine senior officers – most of whom were members of the Central Committee, and one of whom was a Politburo member – expelled very recently from the military and the party.

While we may attempt to read the runes on this conclave, especially as they involve the hierarchy of the party and Xi Jinping himself, getting the faltering economy right remains a burning issue. The problem is that while the leadership is aware of the key problems and may not even trust their own economic statistics, this is not translating into relevant action.

This is partly because it would be a recognition of failure, and partly because required reforms would be politically antithetical to the CCP’s interests. Instead, the government is sticking to its script of prioritising industrial strength as the way forward, exacerbating a major paradox. This is the widening bifurcation of the economy inside China between a relatively small, dynamic, modern manufacturing and technology sector comprising some world-class brands and products, and the rest of the economy featuring swathes of loss-making firms, waste, and overproduction, and a reliance on persistent stimulus.

For now, the government can point to the economy being broadly on track to meet its roughly five per cent GDP growth target this year. Earlier this week, it announced that the nation’s output, or GDP, had grown by 4.8 per cent in the third quarter of the year, the lowest since a year ago, but still just enough to allow the target to be met – as it usually is. In most countries, this would seem like a Herculean accomplishment, but in China, as ever, there are important differences.

First, unlike in other countries, where GDP is a recorded economic outcome of spending and production, the official Chinese GDP numbers are a political data series, devoid of cyclicality, and the outcome of spending and borrowing decisions by state agencies to meet a pre-announced target. Normally, China’s GDP embeds upward bias. The July-September quarter may be an exception because local governments may have over-reported a decline in investment to show they were meeting Beijing’s recently announced goal of curbing overproduction and disorderly competition, aka involution competition. In any event, real estate remains depressed, infrastructure investment is waning again, and even manufacturing investment is very soft.

Second, there is no question that China’s growth has slowed over the last decade and has become increasingly reliant on annual stimulus measures, mostly in the form of borrowing authority to finance infrastructure and directed credit, to meet unsustainably high growth targets. This may fulfil political goals, but at the cost of misallocated capital, bad loans, and fiscal and financial instability risk.

Third, taking all these factors into account – as well as the softness of household spending, especially in the wake of the enduring real estate downturn, and the weakness of employment – the underlying and sustainable growth rate in China, allowing for inflation, may be no more than 3-3.5 per cent. Yet, even using official statistics, China’s GDP growth measured in money terms was only 3.7 per cent in the most recent quarter. This is because broad measures of inflation have actually fallen for the last three years. As an aside, because of this, the window some people thought existed for China’s GDP to overtake the United States sometime in the 2020s has closed. It may now never happen, and nowadays hardly anyone refers to it.

Fourth, much of China’s growth has reverted to a playbook that is 15-20 years old, relying on a strategy from which, it was thought, China would move on: exports. Even though exports shipped direct to the United States have dropped by over 25 per cent, re-routing and transhipment via third countries, as well as a push by Chinese firms to sell more in Europe and Africa, has led to soaring trade surpluses and growing disquiet among foreign nations about the trend. In the July to September period, trade accounted for about a quarter of officially measured GDP growth.

Fifth, even though Chinese officials and many commentators have been talking for years about the need for China’s economy to rebalance towards more household consumption, the opening up of service industries to competition, and a more prominent role for private firms, talk has not turned into meaningful structural reforms to realise these goals. The government’s commitment to industrial policy and production is without doubt its main priority, and in many ways this is antithetical to such reforms.

The government is quite candid about the economy’s headwinds. The People’s Daily recently ran some articles, by way of prelude to the Fourth Plenum, detailing these as including overproduction, deflation, the fiscal crisis in local governments, and the troubles in the real estate market, now in its fourth year of contraction.

Yet, the preferred solution to deal with these is not, as many would expect, the use of budgetary and social welfare policies, or pro-consumption reforms, or more radical measures to allow weak firms and banks to pass to stronger private-sector owners. Driven by its laser focus on security, and its angst about relations with the United States and the West, the government is expected to double down on promoting industrial strength, re-emphasising, for example, support for AI, green energy, biomedicine and other advanced manufacturing. This is the backdrop to the 15th FYP.

In the 13th FYP (2016-20), Xi’s first, the emphasis was largely domestic and Xi insisted that high growth needed to give way to more innovation-led, high-quality growth. In 2020, as Covid ripped through China and in the final year of Trump’s first administration, Xi shifted the emphasis of the 14th FYP more towards industrial strength, amid calls for greater national security and self-reliance. Since then, the geopolitical backdrop has pretty much ensured that the 15th FYP will be guided even more by the national security and external issues to which the CCP sees industrial dominance as the answer.

It is expected that the government will press on with incremental increases in welfare commitments, assure citizens that it will try to raise the role of consumption in the economy, and establish new laws and regulations to remove local protectionism and red tape within the Chinese economy. No one should be in any doubt, however, that these are of secondary importance to Beijing’s main focus on industry and security.

The next big economic event will be the Central Economic Work Conference in December, by which time it is likely that additional stimulus measures will have been announced. Impressive as some of China’s leading industrial firms are, they are not going to resolve the fundamental issues that confront China’s economy. Only political leadership and reform can do that, and the party isn’t going to go there.