Pending and Impending Reforms
Covering Chinese policy and rhetoric on external events and actors, military and security issues, economy and technology, and bilateral relations with India.
Looking Ahead to China’s 2024 Third Plenum
Cross-Posted & Modified from a Takshashila Institution Issue Brief
The Politburo of the 20th Central Committee of the Communist Party of China, at a meeting on June 27, 2024, announced that the much anticipated Third Plenary Session of the Party will be held in Beijing from July 15 to 18, 2024.
History and Significance
Of the six or seven plenary sessions conducted by each Central Committee of the Chinese Communist Party in its five-year tenure under a new (or renewed) leadership, the third plenary session marks deliberations on the economic agenda of the leadership and the trajectory of the country’s economy for the next five years. Even though the third plenum has historically taken place in the October-November period in the same year as the appointment of a new Politburo and central committee, this time, the plenum has been delayed by several months and is now being held in July. Hence, the 2024 plenum is much anticipated, especially in the context of a slowing Chinese economy and structural changes underway.
Historically, the agenda of the third plenary sessions has always revolved around enhancing the quantity and quality of economic reform. The most notable of the sessions in CPC’s history was the third plenum of the 11th Central Committee held in 1978, which effectively ended Mao Zedong’s ‘Cultural Revolution’ and heralded a new era of “reform and opening up” under the leadership of Deng Xiaoping.
The third plenum of the 14th Central Committee, held in 1993 under the leadership of Jiang Zemin, similarly promulgated China’s shift to a socialist market economy, as per the reform agenda proposed by the then Premier, Zhu Rongji.
Most recently, during the third plenum of the 18th Central Committee in 2013, under Xi Jinping’s chairmanship, unveiled a robust agenda of reform. These reforms pertained to transforming the hukou (household registration system), loosening the one-child policy, overhauling the judicial system, bridging the urban-rural divide, tackling local government debt, and stepping up the role of the market and State-Owned Enterprises in shaping the economy. Many of these reforms are now legacy reforms pending since the third plenum (reforms of the hukou system have even been in discussion since before 2013).
In the run-up to the third plenum, the weakened confidence in economic growth has become the central challenge around which reforms are expected to be announced.
Broad Agenda of the Upcoming Third Plenum
The goal of this Third Plenum is two-fold – to comprehensively deepen reform and opening up further, and to pursue ‘Chinese-style modernisation’. The “first principle” to fulfil this two-fold goal, as proposed by Chinese President Xi Jinping at the aforementioned Politburo meeting, is “adhering to the comprehensive leadership of the Party.”
Theoretical Underpinning
Comprehensively Deepening Reform
Elaborating on the idea of ‘Comprehensively Deepening Reform’, Xi Jinping has underlined three central questions: what to reform, where to reform, and how to reform.
On ‘what to reform’, Xi argued that “the overall goal of comprehensively deepening reforms is to improve and develop the socialist system with Chinese characteristics and promote the modernization of the national governance system and governance capacity.” On ‘where to reform’, Xi stated that “the root purpose of promoting reform and development is to make people’s lives better,” and on ‘how to reform’, Xi propounds that “reforms must break and establish, with the right method leading to success and the wrong method leading to failure or even adverse effects.”
Building a socialist system with Chinese characteristics has multiple pillars. The first entails addressing the principal contradiction of the “new era”, which is between unbalanced and inadequate development and the people’s ever-growing needs for a better life. This has evolved from the previous principal contradiction between backward social production and ever growing material and cultural needs of the people, and this change was announced by Xi during the 19th National Congress of the CCP.
To address the principal contradiction of the times, investment must be made in diverse directions – alleviating poverty, undertaking comprehensive rural revitalisation, building a large middle-income base, fighting pandemics and floods, stabilising the economy, and adapting to a changing and increasingly hostile external environment. Most importantly, it requires the Party to become the “steering force” of reform, permeating its reach to the grassroots, while not straying away from the “mass line.”
All the while, to undertake reforms, what is required of cadres is continued investment in the improvement of the institutional system with the Party at its core, as well as the adoption of “scientific methods” of policy implementation. In most cases, “scientific” implementation does not necessarily mean unique or innovative, but systematic, in that it interprets vague Party guidelines as closely as possible, and delivers on high growth in domains the Party has recognised as core and critical.
Chinese-Style Modernisation
Chinese-style modernisation is an important extension of constructing a socialist system with Chinese characteristics, in that it focuses on creating mass support for the institutions of the party-state in exchange for the party-state assuring the people of continued investment in employment, income growth, education, healthcare, and housing. Xi iterated this sentiment during his tour of Shandong province in late May, where he talked about “the need to identify the key areas of reform and achieve breakthroughs based on the pressing concerns and aspirations of the general public,” going on to list the above-mentioned areas of concern.
What to Look Forward to
In the run-up to the Third Plenum, the Politburo has highlighted that two “forces” must be liberated to create the right conditions for “comprehensively deepening reform” further – productivity and social vitality.
Liberating and developing productivity involves fully unleashing “new quality productive forces” (economic forces that guarantee the highest total factor productivity, even at the sake of high quantity growth), and establishing production relations and governance structures that align with new productivity development (may refer to tightened control of the party of “productive forces” – private enterprises, consumers, and capital markets).
Liberating and enhancing social vitality relates to social fairness and justice, closely connected to the economy, as well as the betterment of people’s livelihood.
In this regard, at the upcoming Third Plenum, it will be crucial to observe measures pertaining to the idea of ‘new quality productive forces’. On this, there will most likely be a promulgation of provisions surrounding greater innovation to achieve “high-quality growth.” This would also entail reforms aimed at talent cultivation, scientific and technological education, and building a “modern” industrial system.”
Further, the highlight of the Plenum shall be measures taken to iron out the relations between the Party-state and the three big economic players – enterprises, investors and consumers – going forward.
Enterprises and Investments
Various threads have the potential to emerge during the Third Plenum’s deliberations on private enterprises and investments. The first revolves around the priorities that are likely to be laid out for economic growth moving forward, and at the core of these priorities is “hard technology.” In his remarks at the 2024 Lujiazui Forum held in Shanghai on June 19, the Chairperson of the China Securities Regulatory Commission, Wu Qing highlighted the ‘STAR Market Eight Measures’ programme, which prioritises nurturing firms that invest in innovation of critical technologies such as integrated circuits and biotechnology. It indicates that the Third Plenum will create incentives for home-grown enterprises conducting research and development in technological innovation.
‘Hard-Technology’ in Focus
This quest for self-reliance in critical technologies, in the wake of sanctions levied against China by the US-led West, also requires intensive capital investment. However, with investor sentiment down owing to fears of regulatory interventionism and the overall slowdown in the Chinese economy, the Plenum is likely to see a heightened narrative on “actively developing venture capital” and “strengthening patient capital.” These have been acknowledged as the building blocks of the “new quality”, technologically-advanced productive forces in the Politburo meeting report, which also calls for efforts to “fully stimulate private investment.”
Attracting Foreign Investment
At the same time, foreign capital has been recognised as crucial for the continued growth and development of the Chinese economy. With foreign investor sentiment equally affected by structural challenges, the Politburo report has also highlighted that the Third Plenum will intensify efforts to attract and use foreign investment. At the end of 2023, net foreign investment inflows into China stood at a historic low of US $42.7 billion, a number last seen in 2000. Further, in the first quarter of 2024, the number continues to show a decline, with a quarter-on-quarter decline of 56%.
And so, policy moves to improve foreign investor sentiment in the country are already underway. The latest “temporary adjustments” to various laws by the National People’s Congress Standing Committee in Pilot Free Trade Zones are such an example. One such adjustment is to the PRC Law on Regulation and Supervision of the Banking Industry. As per the adjustment, foreign-invested financial institutions in the banking sector are no longer required to undergo an elaborate approval process to either establish a new branch or terminate operations of an existing branch at local levels in Pilot FTZs. The goal is to “optimise the business environment, stimulating the market’s vitality.”
The Significance of Exports
This endeavour is likely to be coupled with continued emphasis on exports. It is important to note that for China to expand trade in intermediate goods, service trade, digital trade, and cross-border e-commerce is central to the organic and interdependent connection between the country and the global market. Ideas surrounding high-quality development stimulated private investment, and the incentivisation of technological innovation all converge towards the goal of making Chinese trade indispensable to global economic growth. Exports are also crucial to address the supposed overcapacity within the Chinese manufacturing ecosystem, which cannot alone be addressed by the already weak domestic consumer sentiment. In this regard, any narrative surrounding China’s attempts to replace export-led growth with domestic consumption-led growth must be taken with a grain of salt.
Balancing Capital Market Vitality and Party Control
As highlighted above, the Plenum will most likely also feature deliberations on injecting “vitality” into capital markets. At the same time, it is unlikely that there will be any signalling to indicate easing of State control over the functioning of capital markets. In fact, as per the remarks made by the governor of the People’s Bank of China (PBOC) Pan Gongsheng at the Lujiazui forum, the Party-state is preparing to expand trade in government bonds, but not with the purpose of “quantitative easing”, but rather to buy and sell them as required to create a “stable liquidity environment.” His remarks were complemented by those of Wu Qing, who argued for prioritisation of regulatory oversight to reduce financial risk and protect investors, echoing the State Council’s nine-point guideline for the development of China’s capital market.
Property Sector in Crisis
Further, as per Pan’s remarks on the real estate sector, the government’s measures continue to focus on cutting housing loan interest rates and creating affordable housing. With a heavy emphasis on delivery and cost-cutting solutions, the policy emphasis on keeping the property sector enterprises afloat is dwindling. This has also been the highlight of Chinese Premier Li Qiang’s remarks at the recent State Council meeting on June 7, which signals non-reversal of course, and no impending infusion of massive monetary infusion. Thus, the deliberation at the Third Plenum on real estate is likely to revolve around the proposed “new model of development” for the sector, which will follow a two-pronged approach of reducing housing inventory (delivery) while improving the quality of new housing (affordability).
Stimulating Consumption
The highlight of the Third Plenum agenda is most likely to be measures for the invigoration of domestic demand. So far, methods to stimulate demand have been supply side, focusing on keeping employment stable and their payroll consistent. Banks and lending institutions have also maintained steady liquidity vis-à-vis easy loans and reduced interest rates on housing. However, demand-side measures surrounding fee rebates and preferential tax rates have proven little successful. While in 2023, private taxpayers have been the biggest beneficiaries of the eased tax policies, both investment and consumption sentiments have remained weak.
A major factor for this is that an average consumer’s savings have been tied up in the property market, which is leading to declining buying sentiment. And on both sides of the age spectrum, both young and old consumers are spending less for reasons related to income insecurity and high savings posture respectively. Overall, too, savings rates in China have been one of the highest in the world, especially since the 1980s, when reform and opening up led to increased incomes, which ultimately translated into higher savings. Even though retail sales in the first quarter of 2024 have seen an uptick, the overall trend of consumer spending is weak. In that regard, it would be important to assess demand-side policy proposals at the Plenum to stimulate consumption.
An important aspect of consumption related reforms is the transformation of the hukou system. Since each Chinese citizen is banded with a particular city, their access to new and better jobs, to public healthcare facilities in a new city, and to new landowning opportunities, is restricted. This pushes migrant workers in urban centres to save more in the face of potential risks, and pushes down consumption.
Hukou reforms also tie into the creation of a unified labour market. This may have the potential to curb local protectionism, which in turn creates debt risks for provincial governments, as they expand their fiscal deficit by excessively subsidising development of local firms. In this regard, it is interesting to note that the issue of local government debt, though passingly highlighted, does not seem to be a key area of discussion in the run-up to the plenum. However, while there may be deliberations on the issue and how to tackle it, no major changes in the course of action are expected to be announced.
Conclusion
Overall, as the world sets eyes on the outcomes of the 2024 third plenum, it is significant to acknowledge that reforms will not materialise overnight, and neither will breakthrough announcements indicate a reversal of the structural slowdown of the Chinese economy. The positives to observe revolve around measures to stimulate foreign capital and domestic business sentiment, and Xi's interactions with entrepreneurs at his Shandong tour suggests that he is willing to seek opinion. However, unaddressed legacy reforms, as well as new requirements of stimulating Consumption and enhancing technological innovation, all the while firming up Party control over the economy, may remain a trilemma the third plenum doesn't provide adequate solutions for.
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