June 24, 2024
BEIJING – With China’s economy facing a host of challenges, an upcoming conclave of Communist Party leaders is expected to provide the blueprint for growth for at least the next five years.
Yet, after a long delay of the third plenum, plus a flurry of official meetings, inspection tours and study sessions over the past month in preparation for the meeting scheduled for July, analysts are not betting on a decisive shift in economic strategy.
Instead, China is likely to keep its current prescription, including accelerating the drive towards technological self-sufficiency and industrial upgrading, while addressing persistent drags such as the real estate sector and local government debt.
Closely watched will be whether there are greater signals on boosting consumption, which economists have long called for in order to move towards a more sustainable growth model, especially as exports and investment have come under pressure, with trade tensions and flagging confidence in the business environment.
The Central Committee of the Communist Party of China (CPC) – the party’s highest decision-making body – typically holds seven plenary sessions during its five-year term. The third meeting is usually held about a year after the committee is elected and focuses on economic reforms.
The current committee, elected in October 2022, was expected to hold its third plenum by the end of 2023. But it was only in April that the committee’s political bureau announced that the meeting would be held in July, with the agenda as “further comprehensively deepening reform and advancing Chinese modernisation”.
A month later, on May 23, President Xi Jinping went on an inspection visit to Shandong province, where he met economists and business executives to discuss that very topic. He said it was customary for the party to consult widely before “making major policy decisions and formulating important documents”.
At a meeting of the Central Commission for Comprehensively Deepening Reform on June 11, Mr Xi called for a globally competitive, open environment for scientific and technological innovations, among other things. The high-level party organ, formed in 2013 and chaired by Mr Xi, is responsible for supervising the drafting of reform policies.
The latest bimonthly issue of Qiushi – the CPC’s leading journal – published on June 16 contained an article by Mr Han Wenxiu, deputy director of the General Office of the Central Financial and Economic Affairs Commission, that outlined six main tasks of deepening reforms. The office manages the day-to-day affairs of the commission, the highest decision-making body on economic policy.
But the recent clues on what might transpire during the third plenum did not impress analysts.
Dr Dan Wang, chief economist at Hang Seng Bank (China), believes there will not be any surprise reforms announced at the plenum.
“This new government has been clear about its agenda, which is to focus on innovation ability and economic security. The third plenum will likely reiterate policies from before rather than coming up with new ones,” she said.
She expects key themes to include strengthening supply chains and the high-tech sector, as well as financial stability and the social welfare system.
“Resources will be allocated heavily towards heavy industries and high-tech. Boosting demand is more of a short-term macro policy, but the plenum is supposed to be about the economic agenda for the next five to 10 years.”
The CPC’s third plenums have historically resulted in pivotal decisions on the economy. The one held in 1978 set China on the path of opening up, allowing foreign businesses to operate in China. Another held in November 2013, a year after Mr Xi took office, vowed to let the market “play a decisive role” in resource allocation.
But China’s economic recovery post-pandemic has been less robust than expected. In particular, consumption and business confidence remain muted.
For instance, retail sales in May picked up more than expected, at 3.7 per cent, but remains less than the around 8 per cent before the pandemic. Foreign direct investment in China fell to a 30-year low in 2023.
Chinese economy expert Zhu Tian believes a slowdown in household consumption – which is hard to boost in the short term in a high-saving country like China – is not the main reason for the current weakness of the economy.
“Instead, China needs bold measures to boost business confidence and to resolve the liquidity/debt crisis in local public finance and the property sector,” said Professor Zhu, who is from the China Europe International Business School in Shanghai.
As for stimulating consumption, Assistant Professor Lu Xi from the Lee Kuan Yew School of Public Policy in Singapore said that promising higher levels of education, healthcare, retirement, childcare and other social benefits is essential.
This approach would mirror successful East Asian experiences, such as in South Korea and Taiwan.
“However, committing to long-term welfare policies would likely lead to increased civic awareness and social democratic reforms. Therefore, I do not expect China to adopt such measures immediately, even without considering the current fiscal difficulties,” he said.
Mr Charles Austin Jordan, a senior analyst with US-based research firm Rhodium Group, said that for both security and ideological reasons, the CPC is doubling down on its manufacturing-led growth model.
“The measures announced at the upcoming plenum will likely be further confirmation that Xi believes the Chinese model can stand resolute in the face of Western pressure.”
Analysts did not expect that business sentiments would be easily restored.
Mr Jordan said foreign business confidence in the Chinese market is at a multi-decade low due to an ambiguous regulatory environment, Western pressures to diversify and the increasing attractiveness of other emerging market economies.
“In the spirit of self-sufficiency, Beijing may worry less about bringing foreign firms back,” he added.