China’s plans for economic recovery still uncertain after third plenum

Following a wave of reform momentum, the Third Plenary Session of the 20th Central Committee of the Chinese Communist Party (CCP) closed on 18 July. Over the four-day session, the meeting reviewed and approved the resolution of the CCP Central Committee on further deepening reform comprehensively to advance Chinese modernisation.

On 18 July, the state media released a 5,000-word communique, which only provided an outline of the reforms to be implemented. The communique laid out a rough plan with no substantive information for deepening reforms in various areas, including land, foreign trade and investment, medical and healthcare systems, and the military.

The authorities are keeping under wraps the details of the reforms, leaving people to speculate the expected policy for the private sector, foreign investors and Chinese residents, and wait for an official press conference or the release of the full resolution document.

However, the wording of the communique sheds light on the CCP’s overall policy direction. For example, the communique mentions building a “high-standard socialist market economy”, which must be both “vibrant” (放得活) and “regulated” (管得住). The requirements specified for developing ”new quality productive forces”, promoting deep integration of the real and digital economies, and improving the resilience and security of industrial and supply chains, are all in line with the direction announced by the CCP since the 20th National Congress, and within analysts’ predictions. 

Hence, this third plenum is not as significant of a breakthrough as the reform and opening up of over 40 years ago.

The session also affirmed the commitment to complete the reforms outlined in the resolution by 2029 — the 80th anniversary of the founding of the People’s Republic of China.

It is unclear whether this is a lesson learned from the third plenum in 2013, which failed to implement many of its targets. Some netizens mocked that among the 60 reform projects passed 11 years ago, only the relaxation of family planning policies had a noticeable impact on the people. It remains to be seen whether the latest resolution can be fully implemented within the next five years.

China is currently facing severe internal and external pressures. Domestically, many areas are feeling the pressure, with low confidence among private enterprises, weak social consumption, dire youth employment, layoffs in the financial industry, heavily indebted local governments and the deep slump of the real estate market. Moreover, China has entered a period of negative population growth.

According to the National Bureau of Statistics, China’s economic growth in the second quarter of this year reached 4.7%, which is significantly lower than the 5.3% in the first quarter and below expectations. The latest data on new home prices in June also showed the largest drop in nine years.

The external challenges are even more formidable. Donald Trump’s bid for the US presidency seems to be in the bag, and he has chosen as his running mate and successor senator JD Vance, a Republican with a strong stance against China. This portends a thornier outlook for China-US relations. 

If Trump is elected, a more intense trade war between China and the US will be almost inevitable. If the trade decoupling between China and the US continues, tech companies will be the first forced to take sides. 

Under pressure from the Biden administration last year, US investment firm Sequoia Capital was forced to divest its Chinese assets. If this pressure extends to companies outside the US, more foreign investors will be forced to split their Chinese businesses or even withdraw from China altogether, making its economic recovery even more difficult.

Against such a backdrop, the third plenum carries a heavy responsibility of identifying the crux of the issues and coming up with the remedies, while also breaking new grounds. 

The communique highlighted that the officials have no intention of making a major shift from the current track. The reform highlighted in the session focuses on enhancing the market economy’s effectiveness in serving the CCP to set the country’s strategic direction. It aims to harness the innovation of private enterprises and the market’s resource allocation capabilities. This would help achieve technological development, build high-quality modern industries and develop new quality productive forces. 

This line of thinking could be traced back to CCP General Secretary Xi Jinping’s speech during the Politburo’s collective study session on 31 January this year. Xi stressed that to develop new productive forces, it is imperative to deepen reform across the board so as to create a new type of relations of production that is compatible with the development of new productive forces. 

He added that this would require both proactive planning and guidance from the government, scientific policy support, and market mechanism adjustments, with continuous innovation from enterprises and other micro-entities. These are jointly cultivated and driven by the “visible hand” of the government and the “invisible hand” of the market. 

He further asserted the need to further reform the economic system, and the scientific and technological system in order to remove obstacles and impediments to the growth of new productive forces, develop a high-standard market system, and innovate the way to allocate factors of production. Meanwhile, high-level opening up must be expanded to create a sound international environment for the development of new productive forces.

Objectively speaking, there is indeed a need for China to become a technological power and pursue high quality and sustainable development, in order to consolidate its international position. China’s tech industry has accomplished this in recent years. 

However, for a major country of 1.4 billion people, China is in greater need for a diversified industrial structure than small or medium-sized countries. Compared with the service industry, the high-end manufacturing and tech industry are far less able to absorb the labour force. Moreover, China’s export of hi-tech products would be negatively affected as well given the increasingly challenging international situation.

Hence, many financial experts are looking forward to the Chinese government strongly pushing service industry reforms, constructing a high-end, modern service sector, and offering relief measures, while the country rides out the throes of an economic transformation. This would bring down the cost borne by certain groups and salvage societal confidence. It is a shame that this was not expounded on in the communique.  

In an environment where politics reign supreme,China faces another risk whereby if the entire country were to collectively shift to the hi-tech industry that the upper echelon prioritises, there could be a huge waste of resources given the risky nature of this industry. 

For the CCP to deepen reform and form a collaborative “new type of relations of production” between the government and the market, perhaps there is a need to reduce the foreseeable risk of resource wastage. 

Judging by how China has overcome past challenges, the long-term prospects of China’s economy remain generally positive. But the leadership must be more self-aware and hold back from interfering with the market. One cannot have their cake and eat it too: it is a herculean task to form an ideal market environment that is “vibrant” yet “regulated”.

This article was first published in Lianhe Zaobao as “三中全会展示的改革思路”.

Related: China’s quest for breakthroughs with economic reforms | China’s Communist Party faces tall order at third plenum