What To Expect From China’s Upcoming Third Plenum – Analysis

By Yiping Huang

On 23 May 2024, Chinese President Xi Jinping chaired a symposium of high-profile business and academic representatives in Jinan, the capital city of Shandong province. A widely publicised presentation from my colleague and well-known reform-minded scholar, Zhou Qiren, to that session raised expectations of an ambitious reform agenda at the upcoming Third Plenum of the 20th National Congress of the Communist Party of China, which will kick off on Monday, 15 July.

Nearly 46 years ago, the Third Plenum of the 11th Party Congress, in December 1978, decided to undertake China’s economic reform. Since then, each of the past eight Third Plenums has maintained the tradition of focusing on economic reform.

China’s Politburo Meeting on 30 April suggests that the key themes of the upcoming Plenum include deepening comprehensive reform and modernisation. It set out a policy approach of ‘running toward the problem and focusing on correcting it’. Instead of adopting a grand scale liberalisation policy, the Plenum is more likely to announce policy measures to overcome some specific bottlenecks to sustainable growth.

The biggest factor in China’s economic success during the past decades was its transition from a centrally planned system toward a market economy. It also benefited greatly from conditions such as its low-labour cost advantage, its demographic dividend and open international trade and investment regimes.

Over the past 15 years or so, these economic conditions have changed drastically. Noteworthy among these changes are the ageing of the population and the setback to globalisation.

These changes pose serious challenges for the sustainability of China’s economic growth, and its real GDP growth rate halved between 2010 and 2023.

As part of the effort of trying to sustain robust economic growth, Chinese policymakers coined the term ‘new quality productive force’, that aims to boost productivity through innovation. One of the ways of achieving this is through the construction of a modern industrial system, including elements of high-end manufacturing, green energy sectors and digital economy.

The policy agenda of the upcoming Plenum will likely focus on ways to promote innovation and raise productivity. It could cover research and development, protection of intellectual property rights, the design and implementation of industry policy, reform of state-owned enterprises and empowerment of the private sector. All these require further reforms which reposition the state in relation to the market and economic enterprise.

One feature of the Chinese economy that has persisted during much of the reform period has been relatively weak consumption. The share of consumption in GDP was only about 56 per cent in 2023, roughly 20 per cent less than the world average.

Weak consumption is the source of a number of the Chinese economy’s problems. It tends to generate overcapacity in the domestic market. While it is possible for a small economy to export its way out of the problem, that is much more difficult for a large economy. It also raises the question of what is the ultimate goal of economic development if people do not sufficiently enjoy the fruits of economic development.

The Plenum is likely to adopt policies that attempt to share more of the fruits of economic development with the Chinese populace. One area of reform is the possible easing of official urban residency for migrant workers.

Some market participants might feel disappointed that the Plenum will not announce a bold liberalisation program. But the ‘big bang’ approach was rarely China’s style of economic reform and now is not the right time for China’s reform approach to become more aggressive.

The essence of Chinese reform is pragmatism, emphasising conditions that make change feasible and result-driven decisions. The challenge for this gradualist approach is that reform has to keep moving forward steadily, as incomplete reform may create friction and resistance to further reform.

The Chinese economy faces many new challenges that also make it more difficult for the authorities to take more drastic steps towards liberalisation.

Recent adjustment of China’s capital account policy is a useful case in point. The National Financial Work Conference in 2017 decided that China would steadily push forward with capital account liberalisation. But the Central Financial Work Conference in 2023 dropped that policy. Instead, it decided to focus on attracting foreign financial institutions and long-term capital into China. This shift in policy position was driven by increasing concern about financial risks. It was right to press pause on capital account liberalisation until domestic financial risks were brought under control.

The escalation in geopolitical tension, especially the so-called ‘small yard, high fence’ policy adopted by the United States, also changes the cost-benefit analysis of China’s liberalisation policy, increasing the importance of national security concerns.

While many experts, including myself, call for a more bold liberalisation program, the upcoming Plenum will likely continue the tradition of pragmatism by announcing a range of policies that try to tackle some bottlenecks to productivity growth and welfare improvement. This approach will, again, leave some of the important challenges untackled. For the past year, the Chinese government has undertaken various measures to restore the confidence of market participants, especially among private sector entrepreneurs. The Plenum may also make further policy efforts in this direction, but it is hard to predict whether it can fundamentally fix this long-lasting problem.

While it may be difficult to judge if pragmatism is still the best reform strategy, issue-driven policies are the most likely outcome, given China’s reform tradition and the current external environment.

Market participants should thus focus not on whether the policy program is aggressive enough but on whether the policy measures announced will be rigorously implemented and what more needs to be done.

• About the author: Yiping Huang is Professor and Dean at the National School of Development, Peking University.
• Source: This article was published by East Asia Forum