The recent Third Plenum of the 20th Central Committee of the Chinese Communist Party (CCP) concluded with a communique that has sparked a spectrum of reactions from investment banks and foreign businesses. Critics lament the perceived lack of immediate, detailed reforms, yet such responses overlook the strategic depth and long-term vision the Third Plenum aims to establish.
The communique, though concise, serves as a foundational executive summary for China’s medium- and long-term development, with detailed proposals set to follow. An ensuing report comprising over 300 reform measures divided into three major sections, along with further details, is expected to be revealed in the coming months, starting with a Politburo meeting at the end of July.
Immediate market reactions – marked by declines in stock indices and currency depreciation – are misleading. The Third Plenum’s communique is not designed to deliver instant solutions but to outline a comprehensive strategy. The forthcoming details, hinted at during the press conference, include significant reforms such as opening service and manufacturing sectors to foreign businesses, fiscal and tax reforms, measures to boost domestic consumption, improvements to the pension system, and adjustments to urban-rural hukou (household registration) policies. Patience will be necessary to see these reforms fully unfold.
Critics have zeroed in on the omission of the phrase “decisive role” of the market, interpreting it as a regression. However, this view misses the broader context. Unlike the 2013 Third Plenum, which endorsed the “leading role” and “dominant role” of the state-owned sector and “public ownership,” respectively, this year’s communique promised to “put more prominence” on reform and to “better leverage the role of the market.” Although these phrases are open to interpretation, the overall sentiment suggests a coordinated effort to balance market mechanisms with state involvement, rather than diminishing the market’s role.
If anything, the communique conveys an unusual sense of urgency, mentioning short-term risks and growth goals. This signals the leadership’s acute awareness of current economic challenges.
Admittedly, those expecting a bazooka-style stimulus package will be disappointed. Han Wenxiu, deputy director in charge of the CCP’s financial and economic affairs, clarified that the focus will be on removing structural barriers to low consumption, low income, and inefficient resource distribution, rather than on immediate large-scale stimulus.
Yet, it is equally important to note Han’s emphasis on the need for more proactive stimulus measures. He acknowledged that while the economy is moving in a positive direction, significant challenges remain, particularly a lack of effective demand. To address this, the government plans to accelerate the issuance of special-purpose bonds to support local governments struggling with debt repayments and operational costs, exacerbated by the property market collapse.
The press conference also highlighted potential adjustments in fiscal relations between central and local governments. This includes increasing local governments’ fiscal resources and expanding their tax bases, while also raising the proportion of public expenditure covered by the central government. This shift aims to address the imbalance where local governments, responsible for the majority of public services, lack sufficient revenue-raising powers and often resort to debt. Han implied that these fiscal reforms are intended to harness the role of fiscal policy to drive growth, a move likely to be welcomed by investors seeking stronger support amid the property downturn.
Without a doubt, the focus of the plenum is still resolutely on advancing “new quality productive forces,” high-tech industries, and advanced manufacturing. Critics might claim that Beijing’s emphasis on supply-side measures over demand-side support, and prioritizing technology and manufacturing over household consumption, is deeply misguided. However, it is crucial to recognize that Beijing is not blind to demand weaknesses.
The CCP leadership firmly adheres to the Marxist philosophical principle of contradiction and unity, asserting that they can and will address both simultaneously. Granted, it’s a lofty and arguably overly ambitious goal, but it’s important to be cognizant that the strategy is to decisively position China as a leader in advanced technologies while simultaneously aggressively tackling immediate economic challenges through structural reforms.
The press conference also addressed the need for a robust social security network and improvements to the hukou system to better integrate urban and rural areas. This includes providing better public services and social benefits to migrant workers, thereby boosting domestic consumption.
The real challenge of the Third Plenum lies not in the broad objectives – those outlined are commendable – but in the detailed implementation of these reforms. Ensuring these policies are effectively executed will be crucial to achieving the desired outcomes. Past experiences have shown that ambitious reform agendas can be set, but their actual impact depends on the government’s ability to follow through with concrete actions and enforce necessary changes without further bruising already low confidence and trust.
Given the opaque nature of China’s policymaking, initial market reactions and disappointment over the lack of immediate details are understandable. Yet, they overlook the long-term strategic intent of the Third Plenum. As detailed policies emerge, we will gain a clearer understanding of the concrete policy proposals. For now, it is premature to write off the plenum’s potential impact.