On Tuesday, 20 February, the People’s Bank of China (PBOC) cut the mortgage reference rate by 25 basis points to 3.95%, the largest cut since the reconstruction of rate-policy decisions in 2019. The PBOC decision is emblematic of an economy desperate to recover, yet unable to inspire confidence. While cutting the rates intends to drive investment and purchasing of property, the policy is unlikely to inspire additional confidence in the market. Bracketing such policies aiming to boost confidence in the economy are policies such as Wednesday’s creation of new short-selling task forces which investigate and limit firms ability to trade options; banning net sales on the stock market thirty minutes after opening and before closing; or the CCP’s commitment to Xi Jinping thought guiding the tech industry. For every policy which moves the economy forward, another set of policies reverses confidence in the market by two steps.

Although the PBOC will never acknowledge the fact they are up against the CCP and Xi Jinping’s ideological movements, the central bank must manage an economy largely in decline for non-financial policy reasons. Underlying Chinese deflation is an economy marred by distrust that banks possess fiscal solvency and stability, and distrust that government policy can inspire economic growth. Private business confidence hit an all-time low during Covid-19’s initial spread in 2020, and never recovered. Even now, private business confidence is lower than during the larger scale Covid-19 lockdowns in 2022. While the CCP moves ahead with enhancing the security apparatuses, the PBOC is left with the challenge of trying to find policy measures which inspire even miniscule recovery.

While cutting the reference rate by 25bps is a bold policy decision – stronger than market expectations – investors and private citizens are unlikely to move in waves to invest in apartments undergoing construction. Insolvency of construction firms, and incomplete projects, largely contributed to the initial economic malaise across China in 2019. Property measures – including mass infrastructure and housing projects – have served as a key tool for policy makers, to no avail. The Chinese market needs does need more investment and money in the market; yet, people have no appetite for investing their yuan into property. Even if the decision encourages a small blip in investment, it will not be at the rate needed to reverse deflation.

Infrastructure and construction policies have also done little to inspire a reversal in foreign direct investment running out of the market, reaching the lowest levels since 1993. The Ministry of State Security, which has launched a WeChat account to encourage a “spy-catching” culture, has begun to see spies in foreign firms. The agency, which operated for years denying its existence, has begun to encourage reporting routine acts as indications of ‘spying’. On the same day that the PBOC made the 25bps cut, the MSS made a post stating that foreign companies are harbouring spies. The CCP seems dedicated to reinforcing a culture of isolation and sensitivity towards foreign firms. The death sentence charge against Australian journalist Yang Hengjun, released in early February five years after his arrest, also reconfirms a lack of commitment to human rights, jurisprudence or diplomatic cooperation for foreign nationals China’s Foreign Ministry sees as spies.

While the security culture hurts foreign investment, the CCP is likely hoping domestic investment into firms such as Huawei create the needed technological innovation. The CCP has enforced cuts on ‘consumer-based’ technology (e.g., gaming devices such as a domestic version of the Xbox, PlayStation, or consumer-oriented AI), turning domestic tech titans into security-focused companies. If the CCP’s goal under Xi Jinping is to turn the nation into an inward looking, security-focused culture worried about spies around every corner, then it is doing a remarkable job.

Yet, this is hardly the culture that is citizens in China want. Working on military and security/surveillance-oriented tech is a niche industry that cannot provide enough jobs for an entire work force. Turning a nation of Master and PhD students into manufacturing employees is hardly inspiring additional brainpower and supercharged universities. Focusing solely on manufacturing and limiting opportunities for postgraduate students is creating a depressed and repressed culture, uninspired to innovate; potentially inspired to voice dissent in even the most sarcastic comments on WeChat.

Much of this movement is pushing against an entire policy-set proposed by recently retired and deceased Premier Li Keqiang. Throughout the past two decades, he made numerous proposals that would move China to become a nation focused on the movement of goods and people; largely proposing opening to a new form of socialised trade that put sentiment at the heart of policy creation. Such policy would, in fact, work alongside the PBOC’s toolset to encourage the movement of money into the economy.

Yet, Xi Jinping seems to have learned nothing from his former colleague’s policy proposal. Or, even worse, is cogently aware of the policies he is moving the nation towards. Nearly halfway through the 2020’s, China has become a nation consistently more isolated and totalitarian. Instead of advertising cooperative policy, China’s diplomats have broadcast distrust and discomfort with foreign leaders. An increase in hawk-ish war footing and cyber orientation is moving China in one direction: conflict.

This previous Lunar New Year offered a chance for the PBOC and CCP to come together, and make shifts to open the economy to encourage private business trust and consumer spending. Instead, the MSS doubled down on creating an air of distrust. The CCP is pitting itself against the PBOC’s toolset, making it near impossible to create domestic financial movement. Eventually, the CCP will make it impossible for the PBOC to even have a functional toolset.

In mid-March, the National People’s Congress will meet, where they have promised to create legislation for the protection of private business. The results, and action or inaction of that meeting, will likely tell the direction the economy takes for the remainder of the year. If the NPC maintains policy reliant on security and defence, the economy is unlikely to inspire cooperation and incentives at the regional-level needed to fight deflation.

Xi Jinping is running a dangerous course, in which a year after quashing any opposing top-level influence, is killing the toolset of the economists he needs to save his domestic economic performance. Potentially, he is even creating the conditions where a new opposition could form to fight for control of the PBOC’s toolsets. The future of Xi Jinping’s China might be determined on if he allows the most banal of toolsets to guide the Chinese economy.