Four days of highly anticipated high-level Third Plenum meetings (from July 15 to 18) among Chinese Communist Party leaders ended with a perplexingly vague readout.
Indeed, the anticipated meeting’s July 19 press conference failed to assuage China watchers’ general impression of a non-event, even if some 300 reforms were touted by the official Chinese media, most of which were already underway.
As the third plenum under President Xi Jinping’s guidance, expectations were running high for bold action. That wasn’t the case at his first plenum, in the spring of 2014, which could have only set the tone for his mandate so early after his appointment.
The second plenum under Xi, in 2018, focused more on amending term limits in China’s constitution to allow for his reappointment than reforms. This year’s plenum, on the other hand, was the first under an all-mighty Xi unbounded by term limits
It was also the first after the Covid pandemic, which has exposed persistent imbalances in the Chinese economy, not least the very low contribution of private consumption to economic growth.
It is also notable that since the first plenum under Xi, the external environment has deteriorated quite dramatically due to a much more aggressive US leadership, both under Donald Trump and Joe Biden.
The readout and press conference following the Third Plenum thus focused on how difficult the external environment has become for China while acknowledging three key domestic challenges, namely an ailing real estate sector, local governments’ debt problems and systemic financial risk.
Three measures stand out from the plenum’s vague readout: one, a push for more rapid urbanization through reform of rural versus urban land; two, greater centralization of fiscal policy; and three, more focus on innovation and moving up the value-added ladder.
On the first, land system reform was especially prominent in this readout. Accelerating urbanization should create the need for more infrastructure-building and continue to move low-productivity workers from rural areas into cities, thus fostering growth.
On the second, fiscal reform was mentioned as part of a “national strategic planning system” that aims to centralize more fiscal responsibility and cut local governments’ expenditures.
The need to improve local government finances is important and urgent given the huge imbalances between their revenues and expenditures, especially given the collapse in real estate investment since mid-2021. But the direction given in the Plenum’s readout could be problematic.
Further centralization of government expenditure can have implications for several key issues, including the way China conducts industrial policy or spends on research and development, which has long been based on competition among local governments.
The third and final focus of the readout was innovation and industrial policy. This came as no surprise as advancing so-called “new quality productive forces” was already high on the party’s policy agenda a year before the plenum.
But two phrases stand out in the document: “the new system for mobilizing resources nationwide to make key technological breakthroughs” and developing “talent.”
It is hard to know whether the “new system” is really new, or if it is more of the same, namely conducting an innovation-centered industrial policy.
But what seems clear is that China’s leadership is quite content with its supply-centric growth model – no matter the complaints from much of the world about Chinese overcapacity and its dumping of cheap exports into the global trading system.
That’s likely a reflection of the urgency with which Xi wants China to reduce its technological dependence on the US and become more self-reliant. Furthermore, innovation is expected to boost productivity and thereby mitigate the negative impact of China’s demographic decline on economic growth.
Taken together, these three proposed solutions to three key challenges show China is clearly trying to mitigate its structural deceleration through urbanization and further industrial capacity supported by innovation while improving its public finances and becoming more self-reliant.
The hope is that these three measures will create a virtuous cycle through which the systemic risks from the real estate crisis and local governments’ debts are reduced.
The first impression of these measures, however, is that they will probably not be enough to solve China’s entrenched economic woes.
Firstly, neither consumer nor investor sentiment, both needed to restore economic vibrance, is likely to change based on such measures.
Significantly, no specific reform was announced to reduce excess savings and support household consumption at the Third Plenum. This would require the creation of a well-functioning welfare state, which still does not seem to be in the Chinese leadership’s plans.
Secondly, and related to the first point, there does not seem to be any concern about China’s increasingly large production capacity amid lackluster domestic demand and while protectionist forces are rising against Chinese imports in the US, EU and elsewhere.
Lastly, China’s private sector is generally more productive than state-owned enterprises but has been hammered by the Chinese government through tighter regulations and other types of state crackdowns.
The plenum’s readout does not seem to give any hint of a change in direction. If anything, the opposite was signaled by omitting the adjective ”decisive” when speaking about the role of the private sector in the economy compared to the 2013 and 2018 plenum readouts.
All in all, the Third Plenum was clearly not a game-changer in terms of the announced reforms, especially given the challenges China faces both externally and domestically.
It seems as if Chinese authorities prefer to muddle through while doubling down on their convictions. The problem is that by now there is much more mud for China to deal with.
Alicia García Herrero is chief economist for the Asia-Pacific at Natixis and senior research fellow at Bruegel.