Explainer: China’s Third Plenum Communique and Outcomes

From Monday, July 15 to Thursday, July 18, the 20^th Central Committee of the Communist Party of China convened its third plenary session. ‘Third Plenums’ are typically economic reform-focused meetings, and on occasion have gone on to spell out important reform-related breakthroughs. Following the conclusion of the third plenary session, which was attended by the Central Committee’s 199 members and 165 alternate members, a communique was issued – as is typically the case. So, what did the communique say? And what are the larger ramifications of this third plenary session for the near- and longer-term prospects for the Chinese economy?

The IMF’s upgrade of China’s growth forecast and the Plenum’s focus on 2024 targets

There is no doubt that there has been an improvement in business sentiment which is in no small part owed to the many large and small business operating environment reforms undertaken by Premier Li Qiang over the past year. This is reflected, both, in the recent Q2 industrial value added numbers as well as in the IMF’s earlier upgrade of China’s 2024 growth forecast. On the other hand, household consumption, especially retail sales, continues to disappoint and disappoint badly – in turn, highlighting the imbalanced nature of growth in China. As such, looking ahead, it is important that the government continue to deepen its business environment improvements while also providing materially important support on the demand side of the economy, particularly to households to reassure and incentivize them to open their wallets and make big-ticket purchases.

The communique’s reference to an analysis of the current economic situation that was conducted at the plenum as well as the related call to realize the 2024 growth and social development targets are interesting in their own right. Typically, this is not content that one associates with Third Plenum communiques, which tend to frame priorities over longer-term horizons. 

Did the Third Plenum reform priorities and the Communiqué meet expectations

By and large, the meeting and the communique did meet expectations (which weren’t terribly high in the first place though), although one must await the follow-on details on reform roadmaps with regard to individual reform areas. The most important areas of reform were listed, in fact, at the front end of the communique – these being reform and deepening of the S&T ecosystem; deepening high-level liberalization and opening up; accelerating integrated rural-urban development; and sound macro-regulation, effective governance and controlling risks. It is important to note in this regard that the Third Plenum communique is not a new blueprint of reform. That fresh blueprint was already laid out at the 19^th Party Congress in October 2017 when President Xi inaugurated, both, a new era of reform and opening up as well as the move from high-speed to high-quality development. As such, this current Third Plenum communique was more about implementation-related stocktaking and the acceleration of lagging reform areas rather than designing or redesigning macro-structural reform. Viewed from this perspective, it is evident that China remains wedded to its comprehensive 2035 and 2049 economic and societal modernization goals. The introduction of national security-related elements in the communique, which is not typically associated with Third Plenums, is a bow to the geoeconomic and geopolitical tensions that have emerged over the past few years. It is worth nothing after all that this was the first third plenum of the 2020s.

As to progress on the substantive aspects of the individual reform areas, these will become clearer once the text of the plenum “Decisions” is released in the coming days. While one should not expect radical shifts, even the modest bending, prioritization or acceleration of implementation-linked trajectories, such as those related to the recentralization of fiscal responsibilities, the broadening of local governments’ own-source revenues, or the quicker creation of rural land markets and ownership rights to overcome the rural-urban duality could have monumentally large implications for China’s growth and development over time. On the other hand, there are reasons to suspect that the Party has not tackled the drivers of underconsumption in the economy, particularly the tendency for excess precautionary savings among urban households, with the urgency that it could and should have. In any case, a more accurate assessment of the ramifications of the plenum’s outcomes will have to wait a couple of days more.  

Assessment of Communiqué’s announcement of a 2029 timetable for completing relevant reform tasks

The specificity of the timeline is one of the two most important outcomes from the communique (the other being the unaltered focus on high-quality development under conditions of openness, balanced albeit with considerations of economic and national security). The 2029 timeline is significant, given that a key criticism of the reform blueprint introduced at the October 2017 Party Congress has been its tardy implementation. There are elements of the blueprint that remain confined to paper, for the most part. As such, the explicit reference to a 2029 timeline will serve as an important action-forcing mechanism. It will hopefully concentrate minds at the highest levels of the government and bureaucracy to realize the plenum “decisions” in a time-bound manner.

On the other hand, it is just as important to ensure that the plenum goals are earnestly realized. There has been a temptation in the past to declare victory prematurely on difficult structural reform challenges and move on, as was the case with the rationalization of division of central-local revenues proposed in the November 2013 Third Plenum communique. Half-measures on this front during the mid-and-late 2010s means that the Party and government have a steeper hill to climb today to realize the same reform. Timelines are a useful action-forcing device only to the extent that the relevant reform is actually implemented faithfully.

Criticism in the Western media on the Third Plenum Communiqué’s lack of concrete reform measures

There are misconceptions in the Western media on the purposes of China’s third plenums as well as the communiques that they produce. Third Plenums, although economy-focused, are not near-term economic fire-fighting endeavors. Rather, they are meant to enunciate realizable five and ten-year implementation plans related to key structural reforms. In the rare instance when the Party has faced an existential crisis of legitimacy, as was the case in 1978 and again in 1993, third plenums have even provided a platform to pronounce a broad and far-reaching structural reform blueprint. The Party does not face such a crisis of legitimacy today. And a compelling current reform blueprint already exists, having been drawn up and laid out at the 19^th Party Congress in October 2017. In sum, plenum’s produce future reform roadmaps, be it in terms of the conceptualization of reforms or their implementation. As such, the standard to judge this current July 2024 Third Plenum is in terms of its implementation of the broader October 2017 reform blueprint. And that will become better known once the full text of the plenum “decisions” is released.

Coming to the plenum communique, at under 4,000 words it is both comprehensive and succinct. It provides an illuminating snapshot of the challenges ahead and a broad trajectory and timeline for implementing relevant structural reforms. Foreign media mistake the communique for the underlying “decisions” roadmap. In 2013, a rambling Third Plenum communique had disguised a much bolder “decisions” roadmap which was released later (but which, unfortunately, was left to more or less wither on the vine). And so, one must first pause to gauge the proposed depth and detail of reform before passing judgment on the communique and the plenum’s outcomes. That said, the patchy implementation of structural reforms over the past decade has not inspired confidence in the eyes of the foreign media, especially at a time when the Chinese economy is buffeted by structural headwinds. Hopefully, economic sloganeering – of which there has been plenty over the past few years – has given way to more tangible measures that could renew confidence in the Chinese economy’s prospects over the near and longer terms. We’ll have to wait and see.

Relevance of Xi Jinping’s emphasis on importance of “high-quality development” and “new quality productive forces”

President Xi is correct in this regard. The transition from high-speed growth to high-quality development – a process that has been on-going, albeit tardily, since the 19^th Party Congress of October 2017 – is both timely and necessary. No non-natural resource-endowed economy that has made the difficult transition from middle income to high-income advanced economy has managed to do so without switching its development focus from ‘extensive growth’, based on quantitative increases in land, labor and capital, to ‘intensive growth’ based on gains from overall total factor productivity. ‘New quality productive forces’ seizes on this idea. To realize a high-quality development framework, China must continue shifting to a more rebalanced economic structure driven by consumption and services-led growth. It must continue moving towards high-standards international opening that organically combines the domestic and international cycles as well as reform many of the wasteful industrial policy interventions at the local level. And it must continue upgrading its industrial structure to forge a more science and technology-led advanced manufacturing ecosystem.