First impressions from the third plenum

It is a good thing that it happened

Note: hours after publication of this post, the CPC released the decision document. The post below is based on the communiqué . I am still digesting the Decisions, but here is the link: Decision Document (Chinese)

First impressions from the third plenum

The much-anticipated third plenum of the 20th central committee of the Communist Party of China (CPC) took place in Beijing July 15-18 offering few surprises thus far. The 5000 character communiqué, about the same length as the one for the third plenum in 2013, received more than 100 million views on Weibo in the hours after its release according to the Voice of America, a US broadcaster. The communiqué focused on broad objectives and ideology rather than detailed reforms, as was to be expected. The Decisions document, which usually is published within a week of the plenum, is awaited to flesh out the meeting’s theme  of “further comprehensive reforms and promote Chinese Modernization.”

Historically, third plenums have marked significant shifts in China’s policy landscape. In December 1978, Deng Xiaoping used the third plenum of the 11^th central committee to launch his program of “reform and opening up,” the historic break with class struggle and central planning that prevailed under Mao Zedong. Jiang Zemin used the third plenum of the 14th central committee in 1993 to usher in the socialist market economy, with sweeping reforms in fiscal system, banking, and state enterprises.  The 3rd plenum of the 18th central committee in 2013, the first under Xi Jinping, had put forward a new framework for more innovative, productivity drive growth, and established the market as the “decisive force” in allocating resources. 

This year’s third plenum was highly anticipated due to several factors.  The multitude of structural challenges that China’s economy is facing—debt, demographics, demand, deflation, and decoupling—require the robust economic reforms that third plenums tend to deliver. Second, China’s propaganda machine had built up the plenum’s importance, comparing it with breakthrough plenums of the pasts. It was perhaps a bit overdone: on the opening day of the plenum, published a long article on Xi Jinping the reformer, likening his reform credentials to those of Deng Xiaoping. It was taken down a day later, after online comments took issue with that line.  

Third, it has been a decade, not the usual 5 year, since the CPC presented a comprehensive economic reform plan. The third plenum of the 19^th Party Congress that took place early 2018 broke tradition as it was not dedicated to economic reforms.  Instead, it was used to get party endorsement to abolish term limits for the country’s president and vice president, a move that allowed Xi Jinping to stay on as president beyond 2022.

The plenum was held more than 18 months after the 20^th party congress of November 2022, instead of the usual year.  Some say this was because the leadership saw no real need for a reform plenum until recently. Others point to disagreement on the directions of reforms.  The delay may also have been caused by the personnel issues that emerged last year after the abrupt resignation of the minister of foreign affairs and allegations of corruption against the highest military brass.  

Irrespective of the causes, it had been over a decade since the CPC had put economic reforms at the centre of its deliberations, and presenting a clear package of reforms would help rebuild private sector and household confidence in the wake of COVID and the real estate slump.  The fact that a reform focused plenum happened at all is by itself therefore a positive development.  A post-plenum People’s Daily article revealed that the drafting team for the decision document, which had been working since November, was led by Xi Jinping himself.  Whereas there may have been doubts that the general secretary truly owned the 2013 plenum reforms, the current reforms are Xi’s.

Much has happened since the last economic plenum in 2013, economically as well as ideologically.  The communiqué  paid the usual lip service to Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the Theory of Three Represents, and the Scientific Outlook on Development.  What matters now, though, is Xi Jinping Thought for Socialism with Chinese Characteristics for the New Era, and it is evolving rapidly. The central objective is still the Chinese Dream, to be achieved by “Chinese modernization” with a new development philosophy and high-quality growth delivered by a high standard socialist market economy. With the exception of the Chinese Dream, introduced in 2013, none of these terms existed a decade ago, and this year’s third plenum was the place to clarify what all these ideological innovations meant in concrete policy terms.

The centrepiece of the plenum discussions was the “high-standards socialist market economy,” which is the apparent successor of the “socialist market economy” that was introduced in 1992, and which is to be the driving force for high quality growth. A key question is what this new concept means for the balance between government and non-government in China’s economy. The 2013 third plenum had pushed this concept, and had declared that the “market to be the decisive force” in the allocation of resources, while government was to play a regulatory role for the market. This formulation had been maintained and was repeated at the most recent 20^th party congress in 2022. 

This year’s plenum has dropped the decisive role of the market.  Instead, it  proposes that the party should “better leverage the role of the market.” This is hardly an encouragement of the private sector, whose confidence is still recovering from regulatory crackdowns and COVID lockdowns.  At the same time, in a press conference after the conclusion of the plenum Han Wenxiu, deputy director of the Central Financial and Economic Affairs Commission’s general office, and a main drafter of the plenum decision document, said that it was “necessary to create a favourable environment and provide more opportunities for the development of the private sector” in China. Investors can also take comfort in the forthcoming legislation on the promotion of the private economy. Furthermore, the communiqué  reconfirmed the “two unswerving” (the equal support for state and non-state sector), and promises a level playing field in law, access to credit, and government policy.  Nevertheless, the omission of the market’s decisive role is in line with the more statist view on development that has been gaining grounds under Xi Jinping, and that the private sector will be increasingly guided by the party and restricted by regulation.

A second critical question was that of the balance between development and security. From the start of his tenure in 2012, Xi Jinping had put more emphasis on security than his predecessors, and security had taken on growing importance as the external environment for China became less accommodating.  Since the 2013 third plenum, China has established a national security committee (led by Xi Jinping), undertook major reforms of the military, and has stressed self-reliance in energy, food, and technology as well as more reliance on the “internal circulation” (domestic demand) as opposed to external demand. The 20^th party congress had put national security and development on equal footing, and the communiqué reiterates that “national security provides a pivotal foundation for ensuring steady and continued progress in Chinese modernization” while the party needs to “ensure that high-quality development and greater security reinforce each other It.”

Announced reforms of the military repeated the goal of achieving modernization of the PLA by 2027.  The fireworks were in the short paragraph on personnel: “At the session, the CPC Central Military Commission’s inspection report on grave violations of Party discipline and state laws involving Li Shangfu, Li Yuchao, and Sun Jinming was deliberated and adopted.” This promises future prosecution of the previous military leaders in the months ahead, and reiterate China’s challenges to get corruption in the military under control.  In contrast, the plenum confirmed that former minister of foreign affairs Qin Gang, who abruptly disappeared from the public eye last year summer, was allowed to resign, indicating that his offences against party discipline were of a lesser nature.

Surprisingly, the term “common prosperity” was absent from the communiqué. This term, part and parcel of the China Dream, Xi Jinping’s overall goal, broadly implies growth that is better shared than in the past. The term caused concerns in the past, however, with its connotation with Mao’s program of collectivization, and had raised fears of a campaign against business and high-income earners. The communiqué avoids the term altogether and instead focuses on more modest ambitions of “ensuring and enhancing the people’s wellbeing in the course of development is one of the major tasks of Chinese modernization.”  Few would find objection to improving public services, social security, income distribution, and population services while “striving to do everything within our capacity in this regard.”  This suggests tempered ambitions on distributive goals in the coming years.

Those hoping for more stimulus for China’s economy, especially after the weaker than expected second quarter growth numbers, were disappointed. Third plenums are meant to deliberate on structural reforms, and are not the place to announce short-term measures to boost the economy.  Nevertheless, markets could take comfort in the communiqué’s recognition of the headwinds to the economy, and assurance that “we must remain firmly committed to accomplishing the goals for this year’s economic and social development.”  This would imply that the government will act, if growth threatens to fall short of the “about 5 percent” target for this year.

The communiqué announced measures to improve “macroeconomic governance,” including fiscal reforms. In the post-plenum press conference, Han Wenxiu suggested that major reforms in the fiscal system were discussed, including changes in the intergovernmental fiscal system to bring relief to cash-strapped local governments.  Fiscal policy is key for macroeconomic management in today’s China, with monetary policy constrained by overindebted local governments, reluctant private borrowers and an exchange rate policy that leaves little space for more monetary easing.  To become an effective tool, major reforms in the tax system, intergovernmental fiscal system, and budget management are needed, and Han Wenxiu’s words keep the door open for those to be announced later.

At the post-plenum press conference, Tang Fangyu, deputy head of the CPC Central Committee Policy Research Office, said that the adoption of a reform resolution is the most important outcome of the third plenary session of the 20th Communist Party of China (CPC) Central Committee.  Indeed, he promised that the Decisions would include more than 300 reforms divided in 15 sections, putting the 2024 plenum at par with the 3^rd plenum of the 18th central committee.  But the nature of reforms has changed—whereas in previous plenums reforms were predominantly aimed at facilitating marketization and liberalization of China’s economy, they are now meant to strengthen the policies and institutions that underpin Xi Jinping’s view of the world.  The forthcoming Decisions of the third plenum will spell out in more detail what that means for China’s economic governance.

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