With the end of year approaching, the Third Plenum of the 20th Central Committee is set to be held at a critical time for China’s economy. Traditionally, the Third Plenum is dedicated to discussions of economic and social development. This year’s Third Plenum is expected to focus on ‘Chinese style modernization’ (中国式现代化), ‘high-quality development’ (高质量发展) and ‘high-standard opening up’ (高水平对外开放) – key guiding principles coming out of the 20th Party Congress held in October 2022.
Compared to the previous two Third Plena under President Xi in 2013 and 2018 respectively, the external and internal environments have changed considerably. Soaring geopolitical tensions and the consequent restructuring of global supply chains have put a crimp in Chinese status as global factory. The lingering cost-of-living crisis in the west also put a dent in the revving Chinese export engine.
Domestically, the three-year zero-Covid policy and the crackdown on the property market starve local governments of funding to pay for necessary public services. A series of assaults on private sector squeezes the most dynamic part of the Chinese economy, as evidenced by record high youth unemployment rate, subdued private investment and lackluster domestic consumption.
That said, the worst for China’s economy this year is probably behind us. China’s economy gained momentum in the third quarter, with its GDP growing by 4.9% year-on-year, beating market expectations. This led to a 5.2% GDP growth in the first three quarters, raising hopes China will meet its annual growth target of around 5% for the year. Among other data released by the National Bureau of Statistics (NBS) on Oct. 18, retail sales rose 5.5% year-on-year in September, and growth in value-added industrial production remained unchanged from the previous month at 4.5%, both indicating a firming recovery. Urban unemployment rate averaged 5.3% in the first three quarters, decreasing to 5% in September — a second consecutive monthly drop. As a result, the IMF just raised its growth projections for 2023 to 5.4% (from previously 5%).
In the meantime, the subdued property market continued to weigh on China’s economy. Real estate investment fell by 9.1% in the first three quarters, a bigger drop than in the first eight months. In response, China revised its fiscal target by approving the issuance of 1 trillion yuan (roughly 140 bn USD) in sovereign bonds, indicating that top policymakers are still concerned about growth even though this year’s “around 5%” target is almost guaranteed as per NBS deputy head Sheng Laiyun. More policy support is expected going into 2024, including further monetary easing and more explicit fiscal support.
China’s rare mid-year budget revision signalled economic stability was still a priority for policymakers. China’s legislature on Oct. 24 approved a plan to raise the fiscal deficit ratio to about 3.8% of gross domestic product (GDP), well above the 3% target set in March and even higher than the 3.7% in 2020, the year of the Covid outbreak. The National People’s Congress also allowed local governments to front-load part of their 2024 bond quota. It suggested a clearly more proactive fiscal policy stance.
It’s noteworthy that infrastructure investment financing through sovereign bond issuance might reflect a shift in policy thinking by putting more of the fiscal burden on the central government, rather than local authorities which are running out of room to leverage up. In fact, China had shown increasing resolve to help local governments with fiscal problems.
Policy focus remaining strong on the supply-side
Amid slowing economic growth, a protracted property industry slump, beaten-down stock markets and mounting local government debt, Beijing held its quinquennial Central Financial Work Conference in late October to assess the current crisis in the financial sector and set priorities for financial work in the next five years.
The meeting warned of prominent, intertwined problems in the financial sector, hidden economic and financial risks, the sector’s ineffectiveness in serving the real economy, and chronic corruption. The meeting reiterated the general principle of seeking progress while maintaining stability, balancing development and security, and stringently avoiding systemic financial risks. This will thus see stronger regulation, risk prevention and growth promotion under the CCP’s leadership over the financial sector.
Since the catchword ‘Chinese style modernization’ was introduced at the 20th Party Congress, it has become the guiding principle for Chinese economic and social development. The concept features supply-side objectives such as industrial upgrading and self-reliance in key technological sectors, aiming to make China an advanced manufacturing powerhouse. At the same time, ‘Chinese style modernization’ emphasizes three drivers of economic development: advanced manufacturing-centered industrialization, the digital economic/data-driven governance model and green development/new energy.
As for the ‘high-quality development’, the ‘new system for mobilizing the resources nationwide’ (新型举国体制) will feature prominently in the reform of Chinese scientific and technological systems, with the ruling party’s centralized and unified leadership over the science and technology sectors. The system aims to mobilize all the levers of the Chinese government and the society to achieve its strategic goals. The expected emphasis on science and technology development has been echoed in the concluded Central Financial Work Conference, which called for more financing to promote scientific and technological innovation, advanced manufacturing, green development and micro-, small-, and medium-sized enterprises.
The other aspect of ‘high-quality development’ is to build a new model of real estate development, in which each city should implement policies suitable to its situation and take full advantage of its policy toolbox to support housing demand, accelerate the construction of affordable housing.
When it comes to the ‘high-standard opening up’, it is anticipated that the Third Plenum will dial up its message about institutional openness, aligning Chinese domestic standards and rules with those adopted internationally. In the meantime, China will pull out all the stops to attract foreign investment amid rising geopolitical tensions and de-risking campaign. President Xi announced China would scrap all restrictions on foreign investment in manufacturing sectors during the 3rd BRI forum.
The remaining question, as always, is the extent these well-intentioned policies and measures can be implemented and received by the domestic and international investors.
There are some budding signs that President Xi has started to delegate more economic responsibilities to his hand-picked lieutenants. For instance, Chinese Premier Li Qiang has been appointed as the head of the all-powerful Central Financial Commission, the top planner for China’s financial system, making him the first official to lead a top CCP organization that since the 19th Party Congress (2017) has been consistently chaired by Xi himself.
Also, the PBoC, the State Administration for Financial Regulation and the other six ministries on 17 November jointly published 25 concrete measures to help support the private sector, echoing the spirit of the concluded Central Financial Work Conference and containing less ideological language - a sign that Permier Li is taking a more active role in financial policymaking.