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Third Plenum: Focus on 9 reform areas – no drastic policy change expected


The "Third Plenum" – the third plenary session of the 20th Central Committee of the Chinese Communist Party (CCP) – is a pivotal meeting where China’s party leadership will outline its economic and social reform agenda for the next five years.

 

Third Plena in the past have been consequential meetings for China to assess its overall economic and social situation, setting the overall policy direction and priorities and introducing structural reforms, such as the 1978 shift to the credo of “reform and opening up”, or the 2013 reforms of SOEs and the financial sector.

 

Traditionally held about one year after the – equally – quinquennial Party Congress where the new leadership is elected, this cycle’s Third Plenum following the 20th Party Congress in October 2022 is taking place with a delay of nine months in July 2024.

 

It was not until this April that China announced the Third Plenum in its political calendar. As per the CCP Politburo meeting on April 30th, the “Third Plenum” will focus on “further comprehensively deepening reforms and promoting the Chinese-style modernization”.

 

Taking place amid a weakening economy, dampened market confidence as well as growing uncertainty in China’s external environment, observers and businesses are eager to learn how the Chinese leadership intends to tackle both the short-term economic malaise as well as the more fundamental reform complexities that will shape China’s economy in the medium to long term.

 

What to expect from the Third Plenum?

After officially announcing the schedule of the Third Plenum in April, President Xi on May 23 hosted an expert panel meeting with heads of SOEs, private entrepreneurs and foreign investors in Jinan (Shandong) at the margins of an inspection tour to talk about Chinese-style modernization and deepening reforms. This has only been the third time such an expert panel has been hosted by Xi himself.

 

Plus, the expert panel meeting was attended by a hitherto unseen diverse selection of economists and business leaders from state-owned, private and multinational enterprises such as Schneider Electric, Bosch or Apple. It is arguably a genuine channel to collect expert opinions prior to the forthcoming Third Plenum and thus – in our mind – a clear indicator of the themes and priorities that will be discussed in July among senior party members.

 

Among all the experts who attended the panel meeting, nine were invited to give speeches regarding deepening reform (see the full list of speakers and topics in the summary slide below). According to Xinhua News, the speakers covered reform topics such as “deepen reforms in electricity sector”, “promote development of venture capital” or “improve macroeconomic governance system”. Although speech details have not been publicly disclosed, an analysis on each speech’s title in combination with the background of each speaker still provides valuable insights into what will likely be discussed at the Third Plenum.

 

On this basis, we predict 9 key topics:

 

Topic 1: Green transition and market-oriented reforms in the energy sector

China’s green ambition is already driving a shift in its energy structure with a largely expanded utilization of clean energy, which, however, now calls for innovating the old energy system more effectively through more market mechanisms and reforms.

 

Topic 2: Development and governance of China’s capital market

China’s capital market is likely to be reformed in a way that it better incentivizes the formation and deployment of venture capital as a form of “patient capital” (耐心资本), a topic raised during the Two Sessions in March 2024, to provide long-term support to China’s industrial upgrading beyond state capital.

 

Topic 3: Cultivation of "new quality productive forces"

A Qiushi article by President Xi on May 30th based on a speech he gave at the Politburo study session on 31 January this year highlighted five ways to develop “new quality productive forces”, including institutional innovation and deepening reforms in the economic and S&T systems as well as expanding opening-up.

 

Topic 4: Socialist market economy: sustaining the development of the private sector

China is reemphasizing the irreplaceable position of the private sector in its national economy and the intent to protect its development. Subtopics such as transparent regulations, anti-monopoly, or property protection could be discussed.

 

Topic 5: High-level opening up: improving the business environment for FIEs

After three years of Covid pandemic, the Chinese government firmly put its focus on attracting FDI and foreign business travel in the second half of 2023. To strengthen "high-level opening up" (高水平对外开放), China officially aims to better address the concerns of FIEs regarding what is perceived as a deteriorating business environment.

 

Topic 6: "One country Two systems": development of Hong Kong

China aims to rebuild the market confidence in Hong Kong after the 2019-2020 protests, by further integrating Hong Kong into the development of the Greater Bay Area and leveraging its position as a globally competitive financial center.

 

Topic 7: Improving people's livelihood

Improving people's livelihoods is a long-standing commitment of the Chinese government. The May 23rd symposium emphasized that the benefits of reform should be widely shared. Subtopics like the need to increase people’s income could be addressed.

 

Topic 8: Urban-rural coordinated development

The principal contradiction as updated at the 19th Party Congress in 2017 talks about "an imbalanced and inadequate development state despite people's ever-growing needs for a better life" (versus the previous version of "the ever-growing material and cultural needs of the people versus backward social production") and is the ideological foundation for China's policy to pursue more sustainable and balanced development. Also, this aspect is expected to receive considerable attention during the Third Plenum.

 

Topic 9: Macroeconomic policy interference

China aims to strengthen "counter-cyclical" (逆周期) and "cross-cyclical" (跨周期) measures in its macroeconomic policymaking, as highlighted in both the Central Economic Work Conference (CEWC) in 2023 and the “Two Sessions” in 2024. This shall put in place the tools to better manage short-term economic fluctuations while ensuring long-term stability.

 

All nine topics are inferred from the agenda and read-out from the May 23rd expert panel meeting in Jinan. While not explicitly discussed in Jinan, other topics such as SOE reforms, the so-called “domestic demand system”, China’s security needs and how it balances them against development needs, or the childbirth and fertility support system, are further likely key topics to be discussed at the Third Plenum.

 

One particular angle we expect that will also be highlighted is the need to improve of horizontal and cross-ministerial coordination for better policy implementation, which has been emphasized lately, in particular – also – at the CEWC in 2023 and the “Two Sessions” in 2024. As such, the NDRC’s traditional role as coordinator among central government ministries to implement strategic policy guidance from top-level party organs would be further strengthened.

 


Conclusion and outlook

It is common practice in China that an important meeting such as a plenary session follows a meeting with experts, a more dialectical format to test, position and refine policy ideas. President Xi's personal attendance to the panel meeting in Jinan thus serves as the key preview indication for the upcoming Third Plenum. Guests and speakers are likely to have been pre-selected based on the topics that leaders want to discuss.

 

In line with the evolved socio-economic realities and broader policy context, we expect the Chinese leadership to set new goals at the Third Plenum on the path to “Chinese-style modernization”. This will shed light into how confident or worried the leadership is about the current economic challenges, and in particular where the economic policy attention will focus on going forward.

 

At the same time, based on recent policy documents and speeches, we also don’t expect any drastic “breakthroughs” or policy shifts. Given the complexity of both the short-term cyclical challenges as well as the more longer-term structural transitions Chinese policymakers need to navigate, the leadership realistically will instead continue its gradualist approach by adhering to the long-held reform philosophy raised by Deng Xiaoping of “crossing the river by touching the stones”.

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