China’s third plenum – watch what they do, not what they say

Last week’s plenum was light on substance, but even if the CCP had been clearer about its intentions, we might still be none the wiser about the direction of policy.

Expert comment Published 22 July 2024 3 minute READ

David Lubin

Michael Klein Senior Research Fellow, Global Economy and Finance Programme

When trying to understand China’s economy, it’s worth remembering that the gulf between what Chinese policymakers say and what they do can be vast. Let’s call that a ‘Type 1 problem’. But sometimes they just don’t say very much at all, and this one might call a ‘Type 2 problem’.

Last week’s third plenum, a five-yearly top-level meeting which on occasion has delivered important signals of Beijing’s grand economic strategy, served up a Type 2 problem. Unless you attribute a great deal of significance to Beijing’s ‘Five-Sphere Integrated Plan’ or the ‘Four-Pronged Comprehensive Strategy’, the plenum’s communique was long on slogans and short on substance.

A lack of clarity

To be fair, many of these slogans do genuinely reflect deep thinking about policy. When Beijing officials talk about ‘the new development philosophy’, ‘Chinese modernization’, ‘high quality development’, ‘new quality productive forces’, or a ‘high-standards socialist market economy’, these are references to real objectives.

It’s just that their constant repetition adds little to anyone’s understanding of how policy is being shaped. Not even the full set of decisions that were adopted, published yesterday and whose English translation exceeds 17,000 words, offers many hints.

This lack of clarity is especially unfortunate now, for two reasons. First, because there is an undeniable confidence problem within the Chinese economy that policymakers don’t seem to be facing squarely. And second, because expectations for this year’s third plenum, the first to deal directly with economic policy since 2013, were firmly on the optimistic side.

The reason why hopes were so high for last week’s meeting is that there had been the beginning of some effort in recent months to support both the real estate market and the labour market, two areas of notable weakness. 

There is an undeniable confidence problem within the Chinese economy that policymakers don’t seem to be facing squarely.

The People’s Bank of China offered a facility to fund the purchase of unsold housing; down payment requirements for home purchase were relaxed; a floor on mortgage rates was abandoned; a number of cities announced an easing of purchase restrictions; and Xi himself has emphasized the need to seek ‘full and high-quality employment’ as the primary goal of economic policy.

So far at least, none of this effort seems to have worked. Property prices for existing homes across 70 Chinese cities fell last month by 7.9 per cent year-on-year, a record decline. And household confidence remains extremely weak: the year-on-year growth rate of retail sales in June was a mere 2 per cent, lower even than the US.

Meanwhile, firms have been reducing their liquid bank deposits in favour of higher-yielding time deposits which aren’t available immediately. Their willingness to commit new capital to projects is low.

All this is background to the recent news that GDP growth fell to a disappointing 4.7 per cent in the second quarter. But even if we had more clarity about the direction of policy, there would still be the risk of a Type 1 problem.

Lagging private sector

That kind of problem was on full display following the last third plenum that had economic policy at its heart, in late 2013. At the time, the plenum was widely assumed to have huge historical significance because of its promise to give market forces a ‘decisive’ role in allocating resources throughout the Chinese economy.

This looked like an upgrade for the private sector, whose role in the economy had previously been described as merely ‘basic’. As a result, the plenum elicited an optimistic response in the West: China’s reformist course seemed set.

What happened, though, defied those expectations: the growth rate of privately produced output collapsed in the years after 2013, and in recent years there has been an almost complete convergence of the growth rates of privately-owned companies and state-owned companies; hardly a signal of any commitment to private sector dynamism.

This progressive sagging of private sector ‘mojo’ in the past few years is important to bear in mind as a root cause of the Chinese economy’s current slump.

Since President Xi declared his commitment to ‘comprehensive national security’ in 2014, the state’s role in the economy has threatened to eclipse private sector inventiveness. 

Consistent with this, Xi’s 2021 campaign against the ‘unrestrained expansion of capital’, with subsequent crackdowns on the tech sector, the private education industry, the gaming industry and others, had a freezing effect on animal spirits across swathes of the Chinese corporate sector that has not fully thawed.

This progressive sagging of private sector ‘mojo’ in the past few years is important to bear in mind as a root cause of the Chinese economy’s current slump.

And although recent months have delivered some signs of more active policy, others point in a different direction. The central bank’s overall balance sheet, for example, has contracted since the end of last year. The growth rate of credit supplied to the economy is lower now than at any time in recent memory.

Geopolitical challenges

What all this adds up to is an exceptionally defensive approach to managing the economy, and the best way to explain this is in the context of the geopolitical challenges that Beijing sees itself confronted by.

The authorities are unwilling to provide fiscal support to households for fear that public debt might grow to levels that threaten financial stability, which Xi considers to be a core element of national security. And monetary policy remains tight for fear that more capital might leave the country if interest rates were lowered by more than symbolic amounts.

Relentless focus on manufacturing and high-tech does more for China’s strategic position than it does for households’ sense of well-being.

What support there is aims mostly to enhance China’s manufacturing prowess in a bid to shore up the country’s self-reliance and insulate it from the risk of sanctions or other forms of economic warfare. Since China has now installed well over half the world’s industrial robots, that relentless focus on manufacturing and high-tech does more for China’s strategic position than it does for households’ sense of well-being.

All in all, the third plenum looks like a missed opportunity to give Chinese households any reassurance about their economic position. For a security-obsessed leadership, though, that may not have been the point. In any case, the persistence of Type 1 and Type 2 problems means that we just have to keep watching to see what they do rather than what they say.