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Periodically throughout the year Broadway Intelligence has looked at trends in the Chinese economy and how these may affect China’s direct foreign investment environment. We now provide an update following the key "Third Plenum" meeting between 15th and 18th July.
What was the "Third Plenum"?
It is useful to begin with an explanation of the sometimes arcane nomenclature of the Chinese Communist Party (CCP).
The CCP holds a Congress twice a decade. Members of the Party’s Central Committee, the highest party decision-making body, are elected at each Congress. The 20th Central Committee was chosen at the last Congress which took place in October 2022. In between Congresses, the Central Committee holds seven plenums attended by all 205 full and 171 alternative members of the committee. The third plenum has traditionally focused on long-term economic reforms.
This year’s Third Plenum was highly anticipated by analysts who were expecting President Xi Jinping not only to spell out China’s economic direction for the next five years, but also how the Chinese government intends to deal with the effects of the bursting of China’s real-estate bubble and its knock-on effects on everything from monetary and fiscal policy, to trade policy and even defence spending.
Sluggish growth
The plenum began inauspiciously with China reporting only modest growth of 4.7% for the quarter April to July, less than expected by both Chinese and foreign analysts. Sluggish growth reflected the protracted property crisis, and weak demand from skittish Chinese consumers.
Despite this anaemic growth, there was no indication from the Plenum that China intends to adopt stimulus measures to boost consumer confidence and spending, or to underwrite budget shortfalls in provincial government’s whose tax incomes from land sales and property development have fallen dramatically since 2022.
Instead, the post-Plenum policy announcements indicated a new focus for the economy, combining greater central planning and the allocation of resources to strategic sectors of the economy intended to address geopolitical competition with the United States. The Plenum also guaranteed social welfare programs for the mainly rural poor, in line with Xi’s neo-Maoist populism.
De-emphasized were many of the policies which led to enormous growth in the Chinese economy after Deng Xiaoping’s reforms starting in 1979 and consolidated by his successors such as industrial and trade policies (both fair and foul) designed to boost exports, particularly of manufactured goods such as textiles and consumer items.
A shift in industrial policy linked to geopolitics
China’s new industrial policy will focus on supporting technological innovation in the key industries of the future. Building on strategic priorities already outlined in 2015's "Made in China 2025" ten-year plan, government investment and support will now focus on automative technologies including electronic vehicles (EVs), renewable energy, next generation information technology and communications, advanced robotics and Artificial Intelligence (AI).
Underpinning this shift in industrial policy is geopolitics: the "conscious decoupling" of the US and Chinese economies and the global competition between the two countries for influence and resources. China no longer wants to catch up to the global "West" in economic terms, but to surpass it and therefore shape the contours of the future global economy.
A new focus on centralization and planning
China scholar Elizabeth Economy in 2019 correctly forecasted the other main development in Xi's economic thought. In Foreign Affairs, she noted:
Xi is also intruding into the private economic sphere, extending the CCP’s reach into not only state-owned but also private-sector firms.
He has empowered party committees within private Chinese companies and joint ventures, permitting these purely political bodies to play a larger role in investment and other business decisions. In cities across China, local governments are also dispatching officials to work in private companies for up to a year to help on government matters. The work of all firms, public and private, must now reflect party priorities.[1]
To be sure, although Xi echoes Mao, he is not Mao. There is no prospect for letting the genie of a new cultural revolution out of the bottle, the consequences of which would be unpredictable and perhaps uncontrollable. Nonetheless, Xi is unabashed in reversing large parts of the "capitalism with Chinese characteristics" of the Deng Xiaoping, Jiang Zemin, and Hu Jintao eras (1978–2013).
Evidently, Xi’s interpretation of Marxist-Leninist thought underpins a lot of his economic thinking but, as ever with Xi, politics always trumps economics. Major decisions will also prioritize political considerations rather than economic outcomes, including Xi’s judgments on the fidelity of senior officials to doctrines of the CCP and to Xi himself.
What was missing?
To the disappointment of foreign (and some) Chinese economists, the Third Plenum proved very light on concrete measures to deal with the ongoing property crisis, which was largely caused by developers' overreliance on the proceeds from sales of unfinished apartments and office buildings, and by local and provincial governments depending too heavily on property-related tax returns, which went into freefall once the bubble burst. Fixing this is crucial for China's economic recovery and statements from the Third Plenum recognized the urgency, but were short on detail and substance. Indeed, Rather than unveiling bold reforms, the communiqué following the plenum ". . . reads like a lengthy endorsement of the leadership of Xi Jinping."[2]
A final thought on China’s strategy
The Third Plenum set out China’s future overall strategic direction and not just in the economic sphere. The CCP will ". . . give a higher priority to national security [ . . . ] being the pivotal foundation for ensuring the continued and lasting progress of the Chinese modernization." Furthermore, emphasis was placed on the creation of ". . . a coordinated and highly effective system for protecting national security and to make better use of science and technology to preserve national security". However, the 5,000-word official communiqué and subsequent "decision document" published under Xi’s signature offered few specifics. But whatever the future of China's economy, it seems clear Xi anticipates still being in power and directing the fate of the nation by the 80th anniversary of the foundation of the People's Republic of China in 2029.
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