China's Third Plenum: A Renewed Reform Agenda?
The Chinese Communist Party's Third Plenary Session of the 20th Central Committee was highly anticipated, given the recent challenges China's economy has faced post-COVID. With domestic confidence waning and international tensions rising, the expectation was that this meeting would bring forth a bold vision for economic reform. However, the outcomes revealed a lackluster attempt to lay out future efforts for change without elaborating on how that change would occur.
Economic Policy
The plenum's 17,700-word decision document, titled Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization, largely centered on economic policy. Analysts were keen to see if the party would address the endemic structural problems plaguing China's economy. Unfortunately, the document fell short of diagnosing the economic challenges accurately, needed more new, concrete policy actions, and presented a package of conflicting directives.
The document's focus highlights the critical period for national rejuvenation: "The present and the near future constitute a critical period for our endeavor to build a great country and move toward national rejuvenation on all fronts through Chinese modernization." However, the document stresses the need for government guidance over the market, a departure from the market-oriented reforms promised in 2013. This signals a return to a command-and-control economic model, prioritizing state intervention over market liberalization. While the document reaffirms the importance of economic resilience, it offers little in terms of actionable reforms to address the pressing issues of local government debt, the property market crisis, and financial instability.
Despite the pressing issues, the document states: "Advancing reform is essential for upholding and improving the system of socialism with Chinese characteristics and modernizing China’s system and capacity for governance." Yet, it fails to specifically address any of the three ongoing crises China is facing. Many Chinese are seeing their net worths plummet as the property market collapses. Local governments face funding shortfalls as their main source of income, sales of local land, is impacted by the property slump. Finally, a bubbling financial crisis sees local and regional banks facing increasing debt liabilities.
Coming into the plenum, the party faced a challenging economic environment. Post-COVID-19 recovery has been slower than expected with growth failing to rebound to pre-pandemic levels. This underperformance highlighted deeper structural issues within the economy. Analysts were particularly interested in three main areas: the quality of the economic diagnosis, the concreteness of proposed policy actions, and the coherence of the overall policy package.
Disappointingly, the plenum's decision document fell short in all three areas. The diagnosis of structural economic headwinds was inadequate, failing to address the root causes of the current economic malaise. The document also lacked concrete new policy actions, instead reiterating past promises without providing detailed implementation plans. This lack of specificity was particularly disappointing, given the urgent need for targeted reforms to address China’s three big problems.
An example of such a broad statement is: “We must deepen supply-side structural reform, improve incentive and constraint mechanisms for promoting high-quality development, and strive to create new growth drivers and strengths.” This statement is broad and does not provide specific measures to address the root causes of economic issues like local government debt and the property market crisis. Several contradictory statements were also made: "We will develop better mechanisms to ensure the contributions of production factors such as labor, capital, land, knowledge, technology, management, and data are determined by the market and rewarded accordingly." Simultaneously, the document states, "We will stay committed to unswervingly consolidating and developing the public sector and unswervingly encouraging, supporting, and guiding the development of the non-public sector." Furthermore, it emphasizes, "We will improve the systems for ensuring that state capital and SOEs get stronger, do better, and grow bigger with their core functions and core competitiveness enhanced." These mixed signals are likely to sow doubt over the proposed reforms.
Political Implications
The recent plenum stands in stark contrast to its 2013 counterpart. The current leadership's approach to reform is fundamentally different from the economic liberalization pursued during Deng Xiaoping's era. Xi Jinping's focus is on consolidating power and ensuring the party's control over all aspects of society, including the economy.
One of the larger departures from the past plenum is the emphasis on political security over economic liberalization. The leadership stressed the need for government guidance over the market, downplaying the pledge made in 2013 to let the market play a decisive role in allocating resources. Instead, the plenum highlighted the importance of state intervention and control, with a particular focus on national security and political stability.
This is evident in the increased emphasis on national security, which appears more about political security than external threats. The document outlines measures to enhance the role of state-owned enterprises, strengthen the regulatory environment, and increase the party's control over economic activities with the aim of better addressing national security.
Specifically, it states: "We will deepen reform of state capital and state-owned enterprises (SOEs), improving the institutions and mechanisms for management and oversight, strengthening strategic coordination between relevant administrative departments, and working to refine the layout of the state-owned sector and adjust its structure. All this will help state capital and SOEs get stronger, do better, and grow bigger with their core functions and core competitiveness enhanced." This is a continuation of a concerted effort to consolidate state power and ensure that strategic industries are aligned with national security objectives.
The document also introduced a new target year of 2029 for completing the outlined reforms. 2029 would be the 80th anniversary of the founding of the PRC. This addition creates a sense of urgency, ensuring that the wider party and Chinese society understand that the CCP acknowledges the urgency of the problem. The document’s section labeled “Overall objectives” ends with this statement: “The reform tasks laid out in this resolution shall be completed by the time the People’s Republic of China celebrates its 80th anniversary in 2029.”
It also all but ensures that Xi Jinping is preparing for a prolonged period in power and won’t be stepping down at the next NPC meeting in 2028.
Foreign Policy
Though foreign policy takes a backseat to economic development in terms of the document’s priorities, the plenum stresses China's perception of an increasingly hostile international environment. The document outlines the intent to improve the ability to counter “foreign sanctions, interference, and long-arm jurisdiction,” again highlighting the leadership's focus on strengthening national security.
The document also includes measures to enhance China's capacity to respond to foreign policy challenges. These measures include strengthening mechanisms for promoting security in neighboring regions, deepening law enforcement and judicial cooperation, and improving China's ability to counter foreign sanctions and interference. Additionally, the document reiterates the importance of the Belt and Road Initiative and China's commitment to increasing imports from the global South, indicative of a continued focus on expanding China's influence and economic ties worldwide. "We will make coordinated efforts to advance both major signature projects and 'small but beautiful' public welfare projects" under the Belt and Road Initiative.
However, these ambitious foreign policy goals raise questions about China's capacity to sustain them economically. The country's internal challenges, including slow economic growth, rising debt levels, and a struggling property market, could limit its ability to fund and implement these initiatives. Particularly concerning is the feasibility of China's pledge to increase imports from the global South by $8 trillion by 2030. Current consumer demand would most likely be unable to effectively absorb that $8 trillion and the economic outlines made in the document point towards consumer demand remaining low.
Conclusion
The Third Plenum shows the Chinese Communist Party's continued focus on state control and national security over market reforms. Xi Jinping's leadership will appear to continue to consolidate power, which may ensure short-term stability but risks hindering long-term economic growth.
The document lacks concrete measures to address key economic issues like local government debt, the property market crisis, and financial instability, reflecting a cautious, state-interventionist approach. Conflicting directives within the document further create uncertainty about economic policy.
Politically, the emphasis on national security over economic liberalization signals a shift from previous reformist approaches, pointing towards Xi's intent to maintain control, while very few concrete goals are provided on the foreign policy front.