In One Sentence

• From July 15 to 18, 2024, the 20th Central Committee of the Communist Party of China (CPC) held its third plenary session in Beijing. 
• The session highlighted the CPC’s commitment to “further deepening reform comprehensively to advance Chinese modernization” as well as its focus on important issues such as innovation, education, finance, domestic consumption, and national security, with the aim of fostering a high-standard socialist market economy by 2035.
• Critics in the West expressed their doubt regarding the third plenum’s outcome particularly insofar as tackling China’s near-term economic challenges, and argued that the meeting concluded with few signs of “fundamental economic reforms.”
• China’s economy faces challenges such as a crisis in the property sector, high local government debt, weak domestic demand, and lack of self-sufficiency in core technologies, leading to a downgrading of investor’s confidence in the country’s growth prospects.

Mark the Essentials

• To deepen reform and advance Chinese modernization, the CPC has vowed to build a “high-standard socialist market economy” with a “fairer and more dynamic market environment”; push for “high-quality development” and “all-around innovation” through new institutions and mechanisms that “foster new quality productive forces” and “talent development;” emphasize “coordinated reforms in fiscal, tax, financial” systems, and “equal exchanges and two-way flow of production factors” between urban areas and the countryside. Moreover, the plenum highlighted opening up as “defining feature of Chinese modernization.”
• Unimpressed critics underscored that there were few signs of the third plenum representing a “major change” in the economic policymaking direction of the CPC. Some commentators also argued that the policy decisions are more “cliche” than substance and are mostly superfluous insofar as dealing with the current troika of sluggish domestic demand, property sector woes, and local government debt crisis. 
• The IMF recently upgraded its estimation of China’s economic growth from the original 4.6% to 5% in 2024. Earlier, in March 2024 the Two Sessions of the National People’s Congress had set an annual growth target of “around 5%” for 2024.

Keeping an Eye On…

• China’s Big Man is also a big picture man who happens to be consummately aware of the complex challenges—‘principal contradictions’ in his words—facing China’s modernization ambitions. A succinct paragraph in Xi Jinping’s explanation of the Third Plenum’s Resolution on Comprehensively Deepening Reforms captures the essence of the challenge facing his country: “The market system still needs improvement; the market itself is not adequately developed; the relationship between the government and the market needs to be further straightened out; our innovation capacity falls short of the requirements for high-quality development; the industrial system, while large in size and extensive in scope, is not yet strong or sophisticated enough; the over-reliance on key and core technologies controlled by others has not been fundamentally changed; the foundations of agriculture need to be further strengthened; wide gaps persist in development and income distribution between urban and rural areas and between regions; and weak links remain in improving the people’s wellbeing and protecting the ecological environment.” The Resolution itself, coming in at 17,700 words, is remarkably detailed, compared to the drab 3,700-word Third Plenum Communique. From a policy programmatic perspective, two subsections in the resolution stand out. They are: (a) deepening scientific and technological structural reform (Item #14); and (b) deepening reform of the fiscal and tax systems (Item #17). The S&T sub-section provides the most thorough public exposition so far of the views of the Party leadership on the topic, both in terms of diagnosing the challenge that China faces and the proposed pathways forward. The purported self-sufficiency that is sought in terms of scientific and technological infrastructure is to be achieved through, both, a Party control tower-led topic-down approach as well as flexible market incentives-based approaches that would be familiar to American S&T policy specialists. The fiscal and tax system subsection is the real ‘game changer’ element in the Third Plenum Resolution and is easily the most important outcome of the meeting. It includes arrangements to expand the sources of tax revenue at the local level and place more fiscal resources at the disposal of local governments while also granting the central government greater administrative authority and increasing the share of its expenditure in total government expenditure. Clearly, a good deal of thought and consensus-building has gone into drawing up this reform; this is not where the government was, policy-wise, even as recently as February. Implemented earnestly, these fiscal and intergovernmental tax reforms could be just as influential for sparking consumption-centered growth as the tax sharing system (TSS) reform of 1994—which did away with the perverse incentives of the 1980s-era fiscal contracting system—was for three decades of robust investment-led growth. On the other hand, some of the other proposed consumption-linked reforms, be it with regard to redistribution mechanisms and transfer payments, build out of the social security system, pushing out the retirement age, or reform of rural land ownership systems, appear to lack the needed detail or the required conviction and urgency. The obvious takeaway, then, is that China’s ‘excess savings’ will not be productively absorbed in the domestic economy anytime soon, and that it will remain a point of contention with trade partners for quite some time. As for the external sector, while high-standards opening-up is prioritized, so also is the prioritization of resiliency measures. The medical sector is a prime example. Medical services are to be opened more widely to foreign investors while medical equipment supply chains (along with those for integrated circuits, industrial machine tools, instruments, basic software, industrial software, and advanced materials) are to be subject to risk-controllable resiliency measures. In any case, the chief impediment on this external opening front is not so much the lack of trade and investment market access (China is already a highly open economy) as much as the lack of a level playing field that implicitly favors local players at the expense of foreign businesses and, in the process, also ends up misdirecting capital for the most part to favored local players. As China’s WTO trade policy review (TPR) report also notes, the aggregate scale of industrial subsidies are not easily quantifiable and tend to be doled out non-transparently. All-in-all, the Resolution on Comprehensively Deepening Reforms contains many useful reforms that are key to China’s modernization prospects over the medium term. While foreign observers hoping for quick fixes to China’s stumbling property woes or a ‘big bazooka’ stimulus injection to jump-start flatlining retail sales will be dismayed, the redesign of China’s fiscal structure and system of taxation and the shift towards supporting household consumption (albeit at a slower pace than desired) bode well for the future. Ultimately, the proof of this pudding will be in its eating, i.e., in its implementation. The July 2024 Third Plenum Decisions should not be left to wither on the vine as was the case with the November 2013 Third Plenum Decisions.

Expanded Reading

• China’s Third Plenum Embraces a ‘New Development Philosophy’, The Diplomat, July 19, 2024
• China economy: Key meeting offers few clues on how to tackle worsening downturn, CNN, July 19, 2024
• CPC Central Committee adopts resolution on further deepening reform comprehensively, Xinhua News, July 18, 2024
• China’s Leaders Offer High Hopes, but Few Details for Road to Recovery, The New York Times, July 18, 2024
• China Communist Party policy meeting endorses leader Xi’s high-tech vision for economy, AP News, July 18, 2024
• China calls for bolstering tech ‘breakthroughs’ and achieving the full-year growth target, CNBC, July 18, 2024
• Xi’s Big Economic Meeting Shows Party Bracing for Slower Growth, Bloomberg, July 18, 2024
• China’s Third Plenum does nothing to revive economy, observers say, Voice of America, July 18, 2024
• Chinese Commodity Exports Surge in June on Sluggish Local Demand, Bloomberg, July 18, 2024
• Xi to Map Out Vision for China Economy as Key Meeting Wraps, Bloomberg, July 17, 2024
• China’s third plenum: Xi Jinping tells party to show ‘unwavering faith’ in reform plan, South China Morning Post, July 17, 2024
•  IMF upgrades China’s GDP growth forecasts but warns of risks ahead, Reuters, May 29, 2024