The Chinese Communist Party’s Central Committee will be holding its Third Plenum, a meeting that historically addresses economic matters. President Xi Jinping and the CCP are choosing a moderate response to the deflation the Chinese economy is facing. Their reaction signals a shift toward an economy focused on domestic technological innovation and high-end manufacturing.

The 1978 Third Plenum is known for announcing the market reforms of Deng Xiaoping that led China away from Mao Zedong’s planned economy. Xi’s first Third Plenum was in 2013, when he laid out a policy of market liberalization as well. While the results of these promises were diluted and mixed in practice, they also increased the role of the CCP in the state’s functioning. This year’s plenum will likely not feature anything extraordinary, but it may signal some valuable insights into Xi’s plans for China’s future.

Deflation is slowing the Chinese economy, as consumer prices decrease and pay cuts are common. This has led to Chinese exports struggling and foreign investors leaving as economic activity stagnates and debts become more burdensome.

This deflation finds its immediate origin in the real-estate crunch seen in the collapse of companies such as Evergrande. The Chinese government’s response to these deflationary pressures is also a result of the housing bubble bursting. In 2008, China experienced deflation from the global recession. The CCP then flooded the market with easy money to fight deflation and created the housing bubble that eventually burst.

Remembering how massive stimulus and lowered interest rates from last time hurt them, Xi and the CCP are looking to pivot the economy. The Chinese economy, since liberalizing, has been based on expanding manufacturing through massive investment and large debts. Even without the housing bubble, the Chinese economy was going to face deflationary pressures from competition with cheaper foreign manufacturing.

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Therefore, Xi has spoken about creating “new productive forces.” Instead of focusing on investment-fueled manufacturing expansion, the CCP wants to move China toward an economy led by domestic technological innovation that spurs high-end manufacturing. This would increase salaries and domestic consumption and decrease China’s reliance on foreign markets.

Essentially, Xi and the CCP aim to avoid the middle-income trap and propel China into a developed service economy through state management. It faces a challenging situation as its population is rapidly aging and industries struggle to increase productivity growth. Japan was in a similar situation in the 1990s and famously has since struggled to spur economic growth. Either way, it will be important for the United States to keep an eye on how successful this economic plan is in the coming years.