Key takeaways from China’s Third Plenum 2024
The communiqué of the Third Plenum of the Chinese Communist Party’s (CCP) Central Committee, which concluded on July 18, contains no major policy initiatives to address the country’s near-term growth challenges. This was greeted with a sense of disappointment by Western analysts even though not many of them had expected Chinese leaders to announce a major fiscal package or other measures. Instead, the communiqué reaffirms the CCP’s long-term vision of deepening reform and pursuing modernization—Chinese style—based on the three key pillars of innovation, green energy, and consumption as growth drivers.
Innovation, according to the communiqué, will be driven by further development in education, science and technology, as well as talent cultivation. China has done well in adopting, refining, and rolling out existing technologies; the open question is whether it can foster endogenous breakthrough innovations to stimulate growth and become self-sufficient in high tech in the face of US controls.
China’s green energy sector has seen much progress in the manufacturing of electric vehicles (EVs), batteries, and solar and wind energy products. China has achieved global dominance in the supply chains of these products, which have increasingly contributed to its economic growth and posed a threat to Western competitors in world markets by creating overcapacity which has increased trade tensions. The communiqué doesn’t seem to take this overcapacity problem seriously.
Promoting consumption will likely be implemented the “Chinese way”: strengthening social safety nets, such as insurance schemes and public provisions for unemployment, healthcare and retirement needs of an aging society. The intention of such measures is to induce households to save less and spend more, instead of raising Chinese citizens’ disposable income. After all, the share of China’s labor compensation to gross domestic product (GDP) is about 58.6 percent, just a touch less than 59.7 percent for the United States. Any increase in wages would risk worsening China’s competitive position against regional producers. Moreover, cutting personal taxes or subsidizing consumption would aggravate already stretched public finances: the International Monetary Fund expects China’s government debt-to-GDP ratio to rise from 83.6 percent in 2023 to 110.1 percent in 2029 under current policies.
The communiqué also highlights other important goals and approaches.
- Giving a bigger role to market mechanisms in the context of strengthening the CCP’s guidance and control of economic activities. This approach has been viewed as self-contradictory sloganeering by Western analysts, but China apparently regards it as the key to success in its decades-long reform efforts. One example of this strategy is the public support, including tax and regulatory preferment and favorable credit provisions, to the EV sector more than a decade ago as part of the “Made in China 2025” campaign. This support helped launch hundreds of startups in China. Since then, those companies have been subject to fierce competition to win customers in the marketplace. Steeply falling EV prices have caused profits to plummet and many companies to go out of business. The dozen or so remaining enterprises—BYD, Li Auto, Nio, and XPeng, among others—have become efficient, able to turn out good-quality products at reasonable prices and win international market shares. This has dismayed Western governments, which have resorted to tariffs to stem the flow of Chinese EV imports.
- Implementing fiscal and taxation reform to ensure sustainable funding for local governments. This is taking place against the backdrop of an ongoing recession in the real estate sector, which is reducing land sale revenues for local governments. Some local governments are reaching crisis levels of debt. The reform will try to better match the fiscal revenues and expenditures assigned to local governments, including widening their revenue bases and bigger fiscal transfers from the central government. The recent policy of issuing long-term central government bonds to gradually replace local government debt will continue.
- Persisting in gradually de-leveraging the (still) highly indebted real estate, local government financing vehicles, and small- and medium-sized financial institutions sectors in a way that minimizes the risk of a financial crisis. This will take time to accomplish. Keep in mind that Japan’s real estate bubble in the 1990’s took more than a decade to deflate.
- Unifying the national market by abolishing internal barriers to commerce. This can unlock potential for domestic production, distribution, and consumption. In the context of developing a domestic single market for labor, reforms of the strict hukou system (family registration system) can promote a rational allocation of labor nationally, improving labor productivity.
- Deepening land reform to give farmers more access to increased land values to promote urban-rural integration. This could help reduce the urban-rural income gap: As of 2023, the average annual per capita disposable income in rural areas is only 40 percent of that in urban areas, according to Statista.
- Continuing to open up to the outside world, but presumably more on Chinese terms and less on Western terms. For example, the share of the renminbi in overseas lending by Chinese banks has risen to more than 35 percent from around 10 percent ten years ago. More importantly, many Belt and Road Initiative loans have been concluded using Chinese laws and dispute settlement mechanisms instead of Western ones, such as British laws traditionally used in international bank lending.
A more in-depth document of the meeting is expected to be released soon. It remains to be seen if China’s leadership will follow up with concrete policy measures to implement those long-term goals. At the same time, Beijing still needs to address the present challenge of weakening growth due mainly to lackluster private consumption. Retail sales rose only 2 percent, pulling down China’s second quarter 2024 GDP growth to a lower-than-expected 4.7 percent.
The heady growth rates of well above 7 percent per year, common a decade ago, are over. China’s leaders face difficult and important decisions in the months and years ahead to execute concrete measures to turn the long-term goals re-affirmed at the Third Plenum into reality.
Hung Tran is a nonresident senior fellow at the Atlantic Council’s GeoEconomics Center, a former executive managing director at the Institute of International Finance, and a former deputy director at the International Monetary Fund.
At the intersection of economics, finance, and foreign policy, the GeoEconomics Center is a translation hub with the goal of helping shape a better global economic future.
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