Looking Ahead to China’s 2024 Third Plenum
Authored by the Indo-Pacific Studies Programme
The Communist Party of China will be holding its much-anticipated Third Plenary Session from July 15 to 18, 2024.
History and Significance
Historically, third plenums have focussed on shaping the economic agenda of the country. For instance, the Third Plenum of the 11th Central Committee in December 1978 launched the “reform and opening up” in China. Likewise, the Third Plenum of the 14th Central Committee, held in 1993, announced the goal of building China into a “socialist market economy.” Most recently, during the Third Plenum of the 18th Central Committee in 2013, unveiled the framework of comprehensively deepening reform. These reforms pertained to transforming the hukou system, reforming state-owned enterprises, loosening the one-child policy, overhauling the judicial system, bridging the urban-rural divide, and so on.
These meetings, which bring together the Party elite, have traditionally taken place in late autumn. So it is rather unusual that the Third Plenum of the 20th Central Committee is being held in July. More importantly, it comes at a time when the Chinese economy is facing deep structural challenges.
Agenda of the Upcoming Third Plenum
The June 27th Politburo meeting, which announced the dates for the plenum, also informed that the outcome of the Plenum would be a document titled ‘Decision of the CPC Central Committee on Further Comprehensive Deepening of Reform and Advancing Chinese-style Modernization’. Understanding the concepts of Comprehensive Deepening Reform and Chinese-style Modernisation, therefore, can offer some hints into what one can expect from the meeting.
1. 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’, he stated that “the root purpose of promoting reform and development is to make people’s lives better,” and on ‘how to reform’, he propounded that “reforms must break and establish, with the right method leading to success and the wrong method leading to failure or even adverse effects.”
One of the key takeaways from Chinese writings and discourse on reforms has been around the need to address the principal contradiction of the new era. This was redefined at the 19th Party Congress in 2017, as one between unbalanced and inadequate development and the people’s ever-growing needs for a better life.
Since 2017, economic policy has focussed on innovation-driven development, cracking down on banking and property market hazards, addressing absolute poverty, undertaking rural development, expanding the middle-income base, improving resource efficiency, addressing environmental challenges, and adapting to a changing and increasingly hostile external environment.
These efforts have yielded mixed outcomes. This is a product of several factors. Chief among them, however, is the increasingly dominant role of the Party as the key actor or the “steering force” that must drive reform. The deepening of Party control over all sectors of society has become the first principle of Chinese policy making. In addition, there has been greater top-down control, which has hindered local innovation. For instance, the Party today has far more say in the flow of capital allocation when compared to market forces. Such a politics first environment has meant slower growth and weakened confidence.
Going into the upcoming Third Plenum, there has been a lot of writing on the improvement of the institutional system with the Party at its core. This doesn’t indicate any particular course-correction or easing of political control over capital and enterprises.
2. Chinese-Style Modernisation
Over the past few years, the concept of Chinese-style modernisation has gained greater significance. Official discourse describes Chinese modernization as “socialist modernization pursued under the leadership of the CPC.” It also outlines five core features of Chinese modernization. These are:
the modernization of a huge population
the modernization of common prosperity for all
the modernization of the coordinated pursuit of material and cultural-ethical advancement
the modernization of harmonious coexistence between humanity and nature
the modernization of peaceful development.
In doing so, this concept essentially argues that China’s path to modernisation must be distinct, rooted in its particular conditions. This not only firewalls the Party against any specific criticism on policies but also emphasises building mass support for the Party-state system.
What to Look Forward to
In the run-up to the Third Plenum, the Politburo meeting in late June highlighted the need to “free the mind, liberate and develop social productive forces, as well as unleash and enhance social vitality.”
The key to doing so, the meeting indicated, was unleashing “new quality productive forces.” This has become the buzzword for economic policy over the past few months. Xi Jinping has defined new quality productive forces as those in which innovation plays a leading role, allowing one to break away from the traditional economic growth mode. New quality productive forces also are defined as having characteristics of high technology, high efficiency and high quality. The emphasis on this concept has essentially meant stronger calls for investments in original and disruptive technologies along with basic research. The goal is not only to ensure self-reliance but also self-strengthening, given that technological innovation is increasingly being viewed as not just critical for China’s future growth but also key to geopolitical contestation. Leading into the Plenum inspection tours by key Politburo Standing Committee members, Li Qiang and Ding Xuexiang, have also stressed on the significance of technological development.
Within this context, official discourse leading up to the Plenum has stressed the need to improve production relations and governance structures that enhance the development of new quality productive forces. It is highly likely that reforms will cover areas ranging from talent cultivation, scientific and technological education, investments in research, and policies for building a modern industrial system.*
1. Private Sector Enterprises
The past few years have brought deep challenges for China’s private sector. While rhetorically backing the private sector, the Party-state has sought to strengthen regulation and direct capital in what are deemed as strategically significant domains. Beijing’s perspective remains that private enterprises do not have a carte blanche to pursue profits. They must be constrained by strategic, social and ideological goals. There are no indications that this has fundamentally shifted. For instance, the April 2024 Politburo meeting talked about the need to “fully stimulate private investment”, but this is within the parameters of the priorities identified by the political leadership.
2. ‘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 “new quality”, technologically-advanced productive forces in the April Politburo meeting report.
3. 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 adversely affected by structural challenges, the Politburo meeting 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 per cent.
In this regard, steps have already been taken to address concerns related to foreign capital inflows, such as the latest “temporary adjustments” to various laws by the National People’s Congress Standing Committee in Pilot Free Trade Zones. Another 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 remains to “optimise the business environment” for foreign capital. However, this is likely to remain a challenge for China, considering adverse geopolitical currents.
4. The Significance of Exports
Despite the anticipated challenges, exports have remained a bright spot for the Chinese economy. The Chinese leadership has repeatedly indicated that future growth requires China to remain connected to global markets. This means expanding trade in intermediate goods, service trade, digital trade, and cross-border e-commerce. There are also significant changes taking place in the patterns of Chinese exports. ASEAN countries have emerged as China’s top trading partners, while trade with the US and the EU has been weakening. In addition, there has been an effort to diversify and expand trade with the developing world. Increased exports are also crucial to address the persistent overcapacity within the Chinese manufacturing ecosystem, particularly since domestic consumer sentiment continues to be weak. The Plenum is, thus, likely to further underscore the importance of being connected to global markets.
5. 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.
6. Property Sector in Crisis
Through this year, the Chinese government has taken a series of steps to support the real estate sector. These, however, have not been sufficient to address the distress among developers and in terms of sales and property values. The measures have included setting up of a whitelist mechanism. Under this, local governments can nominate projects that are eligible for funding. Beijing has urged local state-owned enterprises to pick-up housing inventory. In May, the People’s Bank of China announced a 300 billion yuan ($41.4 billion) relending facility dedicated to affordable housing. In addition, steps have been taken to reduce housing loan interest rates and create affordable housing. It is unlikely that the Plenum will result in new approaches to dealing with the malaise of the real estate sector or call to infuse extra liquidity.
Chinese Premier Li Qiang’s remarks at the State Council meeting on June 7, signalled a desire to stay the course. “Work will be done to implement existing policies effectively, alongside the continued study of new strategies to stabilize the market and reduce its inventory,” he said.
The challenges of the property market are interlinked with local government debt risks, estimated at around $13 trillion. Sale of land-use rights have been a key source of local government earnings. The weakening of the real estate market has, thus, hurt revenues. This remains a key policy challenge for Beijing, with few creative solutions on offer.
7. Stimulating Consumption
For external watchers of China, perhaps the biggest talking point heading into the Third Plenum has been whether there will finally be an effort to invigorate domestic demand. So far, measures to stimulate consumption have targeted the supply side, focusing on keeping employment stable, providing financing of projects, and use of fiscal and tax policies. Essentially, these policies have sought to support producers rather than consumers. Concerns around the political impact of inflation, the political challenges of getting local governments to transfer assets to households and an ideological penchant against welfarism hinder demand side efforts.
There are several reasons for weakness in domestic demand in China, ranging from limited wage growth, employment uncertainty to a culture of savings. A major factor is also that the average consumer’s savings tend to be tied up in the property market. A downfall in prices, thus, erodes wealth and infuses greater uncertainty, which in turn hurts willingness to spend. Moreover, on both sides of the age spectrum, i,.e, the young and old, consumers are spending less. Overall, too, savings rates in China have been among 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. Concerns around deflation are still persistent. In that regard, it would be important to watch if there are any radical proposals to stimulate demand at the Plenum.
An important aspect of consumption-related reforms is the transformation of the hukou or household registration system. The system restricts labour mobility by restricting access to public services and asset ownership rights. 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 ties into the overall reform goal of creating a unified national market, which breaks down barriers of local protectionism and promotes the free flow of factors of production and goods and services. Forward movement in this regard has been gradual owing to the political economy of vested local interests and protectionism.
Conclusion
Overall, as the world sets eyes on 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. What is also unlikely to change is any relenting of political control over the economy. The Party’s grip over capital is not likely to ease.
One should be on the lookout for specific statements around investments in science and technology and the system of technology governance, steps to attract foreign capital, demand-side measures to boost domestic consumption, tangible changes to the Hukou system, specific measures on boosting support for private sector and employment and any specific remarks around geo-economic environment, particularly the issue of overcapacity.
* To infer more on the discourse in the run-up to the Third Plenum, one can refer to a “Special Column’ being published by the People’s Daily regularly since 8 July, 2024, titled “New Ideas Leading a New Era of Reform and Opening Up” (新思想引领新时代改革开放).