China’s ruling Communist Party has begun a four-day meeting with a focus on formulating a strategy for achieving self-sufficient economic growth in the face of heightened national security concerns and restrictions on access to American technology. While the meeting traditionally addresses long-term issues, business owners and investors are also eager to see if any immediate measures will be announced to counter the prolonged real estate downturn and persistent economic slump that have hindered China’s post-COVID-19 recovery. The lack of clarity in China’s policy direction has been dampening consumer and investor confidence, making it crucial for China to demonstrate its plans at this juncture. The government reported a slowdown in economic growth to 4.7% on an annual basis for the April to June quarter.
Chinese leader Xi Jinping gave a speech on Monday at a private meeting, discussing a draft of a forthcoming decision on “deepening reform and advancing Chinese modernization,” according to the official Xinhua News Agency.
Increased security measures were implemented in central Beijing for this significant government event. Uniformed guards were stationed at certain subway stations, and neighborhood-watch individuals wearing red armbands were present in public areas.
This decision will serve as a message to local government officials and others regarding the future direction of policy. It is widely anticipated that the decision will align with the path set by Xi Jinping, although some hope for adjustments to address concerns about the government’s growing control over business and society, which may be impeding economic growth.
What exactly is the “third plenum,” and why is it significant?
The third plenum of the Communist Party’s 205-member Central Committee is currently underway. This important meeting, held every five years, was originally scheduled for last year but was postponed.
Throughout history, the third plenum has often been a platform for major economic and policy decisions, although not on every occasion. Analysts believe that this meeting often sets the course for long-term economic strategies.
For example, in 1978, the third plenum endorsed former leader Deng Xiaoping’s “reform and opening up” policy, which transformed China from a planned economy to a market-based economy and led to decades of rapid growth.
In 1993, the plenum endorsed the concept of a “socialist market economy,” solidifying the victory of reformers over conservatives who warned against the dangers of economic liberalization.
Similarly, in 2013, the plenum reaffirmed the importance of market forces in resource allocation, further endorsing the path of reform.
Overall, the third plenum is a crucial event that shapes China’s economic trajectory and reflects the party’s stance on important policy matters.
The previous declaration, which was made a year after Xi took office, did not come to fruition. However, within a few years, the party started to backtrack before changing course in 2017, according to Hofman.
What is at stake?
Under Xi’s leadership, the Communist Party has determined that the party must play a central role in propelling China towards the next stage of development. Despite being the world’s second-largest economy, China, with a population of 1.4 billion people, still remains a middle-income country.
The government has tightened control over China’s booming tech giants, such as Alibaba, the fintech and e-commerce behemoth. In response to increasing adversarial relations with the United States, Xi has urged Chinese companies and universities to focus on developing high-end semiconductors and other technologies that are currently restricted by U.S. export limitations to China.
Concerns have been raised by advocates of free markets who worry that the government’s approach is discouraging entrepreneurialism. Additionally, there are concerns that the growing focus on national security could hinder economic growth. The government has been investigating companies that have transferred economic data overseas, expanding the definition of what constitutes a breach of the law.
While a major change in direction is not expected, the extent to which these concerns are acknowledged during the meeting could indicate the possibility of policy adjustments. What specific policy shifts might occur? It is highly likely that there will be further support for high-tech industries that are deemed crucial for national security and future growth, along with related industrial policies.
However, the party is also facing challenges on other fronts. Alexander Davey, an analyst at the Mercator Institute for China Studies in Germany, highlighted the government’s need to balance two key priorities: economic growth and social equity.
Local governments in China are burdened with heavy debt, leading to the suspension of transit services in several cities due to financial constraints. In February of last year, the city of Shangqiu, which is home to over 7 million people, temporarily halted bus operations.
Davey pointed out that the central government might need to consider issuing more debt to local governments to enable them to continue providing essential services. This decision would involve a trade-off between investing significant resources in science and technology development, which is crucial for national security, and allocating funds for social services.
Investors will be closely watching for any signs that the government, having gained greater control over the economy, will take measures to create a more favorable business environment for private companies.
Additionally, the real estate market is also worth considering. In April, the government unveiled new policies indicating a change in strategy, including direct purchases of unsold homes.
Yifan Hu, the chief investment officer for greater China at UBS bank, commented on this significant shift in China’s property stance in the first half of the year. Hu stated, “This continuous pressure highlights the necessity for further easing measures, which we anticipate will be implemented considering the supportive policy tone.”