By Nathan Gardels, Co-Founder and Executive Advisor, Berggruen Institute

BEIJING – On November 3, Chinese President Xi Jinping sat down at the Great Hall of the People in Beijing with members of the Berggruen Institute’s 21st Century Council to explain the new Five Year Plan that was just released on the eve of our meeting and to discuss his agenda for the upcoming G-20, which China will host in 2016.  It was clear that because of the global character of the Council, President Xi was using the gathering as a platform to outline the course of China’s future development for the world at large.

 

The importance of the meeting for China’s leaders was underscored by gigantic billboards and banners that lined the route from the airport to our conference site at Yanqi Lake on the outskirts of Beijing. When we traveled from Yanqi Lake to meet Xi at the Great Hall of the People, all traffic along the 70 kilometer highway was cleared for our motorcade. The meeting featured as the top story for two evenings in a row on CCTV’s main news channel. In a sign of the weight Xi assigned to our dialogue, he brought along key members of his inner circle, including his chief of staff, Li Zhanshu and Party theorist Wang Huning. Also present were Foreign Minister Wang Yi and State Councilor Yang Jiechi.

 

This blueprint for China’s future embodied in the Five Year Plan signals the most momentous shift in direction since the death of Mao and the advent of Deng Xiaoping’s reform and opening up in 1978. Not a leader to rest on the laurels of his country’s success so far in rising to the top ranks of the global economy, Xi wants to leap over the “middle income” or “Latin American” trap in which development becomes stuck in a low-wage manufacturing export economy. To do that, Xi told us, he needs to avoid as well the “Thucydides trap” of conflict between China as a rising power and the US as the established power so instability does not disrupt growth prospects.

 

The imperative to calm the global waters as China enters a period of economic transition was evident in the recent flurry of diplomacy Xi and Premier Li Keiqang have been conducting in recent weeks. At the time of our meeting, Premier Li had just resumed the stalled “trilateral” talks with South Korea and Japan, meeting Prime Minister Abe in Seoul. Xi himself had just visited the US and the United Kingdom and was just off after our conversation to Vietnam and Singapore where he will also meet Taiwan’s president Ma Ying-jeung – the first meeting between Communist Party and Kuomintang leaders in 70 years.

 

Vice Premier Zhang Gaoli, the Politburo Standing Committee member in charge of the economy, laid out for us the comprehensive dimensions of the plan that will guide China’s development over the next half decade. Zhang envisions linking up China’s manufacturing and infrastructure through the resource and logistical efficiency enabled by the “Internet of Things” — what the Chinese call “Internet Plus.” He spoke of “circular” use of resources in which waste is recycled and about “weakening the urban concentration of Beijing” by integrating development through decentralized, smart infrastructure in the northern provinces surrounding the capital. Under the new plan, he said, the first criteria in the promotion evaluations of mayors, governors and party secretaries will be their “green” accomplishments.

 

The mantra Zhang enunciated that will now be on the lips of every cadre and bureaucrat in every corner of China is “innovation” and “mass entrepreneurship.” Though it is questionable exactly how fully the Communist Party apparatchiks grasp what this means in any practical sense, it nonetheless reflects the recognition of China’s leaders that the export manufacturing model that has resulted in the high-growth rates of recent decades due to massive inputs of labor and capital has about run out of steam.  New wealth and sustained growth, they now understand, can only come from the innovation of industry through the application of information technology.

 

Xi acknowledged that growth in the years ahead would slow to a “new normal” of around 6.5 percent – a figure some members of our group, including Nouriel Roubini, consider highly optimistic. As Nobel laureate Michael Spence pointed out in our talks, there is no precedent for the scale and scope of what China is now trying to accomplish.

Can Innovation Be Planned?

Slogans, of course, don’t make an economic revolution. The big question about this great leap forward proposed by China’s leaders is whether innovation can be planned, and just how far they are willing to go in giving “a decisive role to the market” as the vital spur to “mass” entrepreneurship. The more the market plays a role, the more China’s economy will experience pronounced business cycles instead of uninterrupted upward growth.

 

Jack Ma’s Alibaba, Baidu and the rest of China’s high-tech companies are clear evidence of the entrepreneurial genius of Chinese society when left to its own devices. Indeed, Reid Hoffman, co-founder of LinkedIn and a top venture capitalist, observed at the meeting that Chinese start-ups have an edge over Silicon Valley entrepreneurs because “they work much harder and will do anything to win.”

 

But there is a profound challenge for the Communist Party as it tries to shift from the Second Industrial Revolution to the third: innovation entails steady disruption while the Party seeks above all to maintain stability. It is not easy to see how you can both clamp down and “purify” the Internet by limiting the flow of information, as Xi has called for, while at the same time extolling “Internet Plus” innovation. Can “Internet Plus” and “Internet minus” go together? Where the Chinese authorities decide to draw the line between “freedom” and “order,” as we discussed with Internet czar Lu Wei, will determine the scope of innovation-based prosperity.

 

Nicolas Berggruen talking with Xi Jinping at the Great Hall of the People, Beijing, November 3, 2015.

 

One can be more confident on the integration of smart technology and infrastructure side of China’s ambitions. That lends itself to the long-term continuity of policy and purpose that has been the strength of the one-party system. On this score, the Five Year Plan marks only the beginning of the transition China’s economic managers hope to complete through their longer range policy known as “Made in China 2025.” German Chancellor Angela Merkel was also visiting Beijing when we were there, signing agreements with Premier Li to bolster coordination between the two manufacturing powers. Germany has a similar plan to integrate the Internet into industry called “Industry 4.0.” Here, Germany and China clearly have an edge on the U.S., which has plenty of mass entrepreneurship but precious little political capacity to build out the infrastructure of the future.

 

China faces other challenges as well in the transition ahead. To stimulate faltering growth in recent years, it has unleashed vast amounts of credit into the economy, generating overcapacity in real estate. The massive, empty apartment buildings one used to associate with second and third-tier cities are now plentiful even around primary cities like Beijing. By some estimates, the resulting debt ratio is more than 280 percent of GDP.

 

This debt-fueled effort to keep up the growth rate was necessary because of slackening demand in the global economy upon which China’s export model has depended. It is clear that there is now an interdependence that cannot be disentangled; the world needs the Chinese economy in order to grow, but China needs the world economy to be healthy for it to grow.

In our conversation President Xi pinned his hope on this score to the G-20 summit he will chair next year. As Xi put it, he wants to “cement” the role of the G-20 as the governing body that can coordinate common policies to foster global growth. Not incidentally, the meeting will be held in Hangzhou, the hometown of Jack Ma and headquarters of Alibaba — the foremost emblems of China’s Third Industrial Revolution.

 

In discussions with various Chinese officials, we heard first hand a report on the intensive anti-corruption campaign from a leading member of the Party’s Discipline Inspection Commission. We candidly debated the difference between “rule of law” with an independent judiciary which protects citizens and China’s “rule by law” according to Party leadership with the Vice-President of the Supreme People’s Court. Former Swedish prime minister and head of the Global Commission on Internet Governance, Carl Bildt,  sparred with Internet czar Lu Wei over China’s “internet sovereignty” policy. Bildt called for “one net, one world” in the same vein the Chinese have called for “one belt, one road,” their ambitious vision of recreating China’s ancient Silk Road for the 21st Century, linking up the world with trade deals and infrastructure projects from Beijing to Istanbul.

 

We also discussed the confrontation between the US and China in the South China Sea with the deputy chief of staff of China’s military who decried American “provocation” and aggression but nonetheless ruled out cutting military to military relations.

 

21st Century Council members and invited guests in attendance were drawn from a range of former heads of state and government, former ministers, tech-titans and scholars. These included: Susilo Bambang Yudhoyono of Indonesia, Goh Chok Tong and George Yeo of Singapore, Antony Leung of Hong Kong, Mario Monti of Italy, Carl Bildt of Sweden, Ernesto Zedillo of Mexico, Ricardo Lagos of Chile, Paul Keating and Kevin Rudd of Australia, Shaukat Aziz of Pakistan, Yohei Kono of Japan, Oleg Soskovets of Russia, Shashi Tharoor of India, Prince Turki bin Abdullah al Saud of Saudi Arabia, Seoul Mayor Park Won-Soon, Hillary Clinton’s foreign policy advisor Jake Sullivan, former US National Security Advisor Stephen Hadley, Eric Schmidt of Google, Reid Hoffman of LinkedIn, Evan Spiegel of Snapchat, Fred Hu, Ronnie Chan, Mo Ibrahim, former US Trade Representative Mickey Kantor (who negotiated China’s entry into the WTO), former US Treasury Secretary and Harvard President Larry Summers, former Clinton Administration chief economic advisor Laura Tyson, economists Nouriel Roubini and Michael Spence, Francis Fukuyama, John Gray and  Zheng Yongnian. Juan Luis Cebrian, CEO of the Spanish-language PRISA group and Hong Seok-Hyun, publisher of the Korean daily Jong Ang Ilbo also attended along with Nathan Gardels, Nicolas Berggruen, Dawn Nakagawa and Jenny Bourne of the Berggruen Institute  as well as Senator Robert Hertzberg, a key member of the Institute’s Think Long Committee for California.