China’s Third Plenum meeting concluded on Thursday, with a communique released at around 430pm Beijing time (430am EST).
As expected, the communique provided only an initial preview of the plenum’s decisions, with more details to come. The high-level signals from the communique are consistent with our expectations of incremental reform and no fundamental changes in China’s economic strategy (see our preview report HERE). The plenum dis not focus on near-term macro policy but there was a modestly reassuring nod to the need to “actively expand domestic demand” and limit downside risks to growth this year. All in all, we see little here to suggest a major market reaction in either direction given low expectations from investors coming into this meeting.
A more important “Decisions” document that details the reform policies agreed at the plenum will come out within the next week. At the last major Third Plenum in 2013, the Decisions document came out three days after the meeting. The government will also hold a press conference on the Third Plenum on July 19 at 10am Beijing time (10pm EST tonight). Forthcoming details will be important for assessing the substance of Beijing’s reform plans through 2029, including in areas critical to China’s growth and financial outlook such as fiscal and financial sector reform, urbanization, and industrial and regulatory policies
On growth and stimulus: the end-July Politburo meeting (exact dates TBD) is more relevant to near-term macro policies, but the plenum communique did contain a short section on the current economic situation. It pledges to “actively expand domestic demand,” “implement macro policies well” consistent with the Central Economic Work Conference in December, and manage tail risks around property, smaller banks, and local government debt. This implies that the end-July Politburo meeting, which will discuss macro policies for the second half of 2024, will signal incremental stimulus though not the proverbial “bazooka.” As we noted earlier this week, Q2 data show growth momentum slipping and domestic demand weak (see our analysis of the Q2 data HERE). The leadership is not panicked about the state of the economy but today’s wording does imply recognition of the need for additional support to limit downside risks and to achieve the annual growth target of “around 5%.” The main tool will likely be a modest boost to fiscal/infrastructure spending, which has lagged policy targets this year.
On the reform front, below are some initial reactions to the high-level signals from the communique. This is based on our quick read, and the analysis may change when the Decisions document comes out.
- No major course corrections. As expected, the overall theme is “Chinese-style modernization” and “high quality development.” China’s leadership believes its overall economic strategy is correct, but that some areas of policy must adjust to slowing growth at home and a “severe and complex international environment,” which no doubt centers on intense US-China competition. While there is a greater urgency behind “reforms,” in this context “reform” is less about major market liberalization than modernization of the mechanisms that the Party uses to govern the country and respond to key challenges.
- A more pragmatic tone. While it is somewhat expected given the plenum’s focus on economic issues, it is positive to see that the communique continued a recent trend of emphasizing development issues and shifting away from an emphasis in 2021-2022 on balancing development and security. The leadership recognizes a greater urgency to address economic challenges (slowing productivity, weak domestic demand and confidence, debt risks, etc.) though the Decisions document will be important for assessing the strength of the policy response.
- A modest boost for the private sector. The communique pledges to provide private firms and state-owned firms with equal protection under the law and equal access to finance and other inputs, consistent with recent pledges. However, private firms will continue to be under the “guidance” of the Party. State firms seem set to continue to play a key role in strategic sectors, though a reference to both “managing well” and “letting go” suggests some leeway to let non-strategic SOEs fail and to improve financial discipline. In short, there are no fundamental breakthroughs addressing the Party’s role at the commanding heights of the economy, though Beijing recognizes a need to improve the confidence of the private sector and (perhaps) to clarify the role of the government. This document alone will not revive animal spirits among the entrepreneurial class, which will watch for implementation of Beijing’s pledges and has broader concerns about long-term growth, the domestic political environment, and decoupling/geopolitical risks.
- Innovation and industrial policies are a central focus. Under the mantra of “new productive forces,” Xi will further scale up efforts to try to boost China’s capacities in breakthrough innovation and achieve greater self-reliance (from the US and its allies) in technology and critical supply chains. There was no explicit mention of excess capacity but the leadership recognizes the need to reduce duplicative/wasted investment at the local level and promote a more cohesive national market – how it plans to do this will be important to see in the forthcoming Decisions doc. All in all, supply-side policies to boost China’s productivity, especially in advanced manufacturing, continue to receive more policy attention than the demand side.
- Fiscal and urbanization policies are likely to see a faster pace of incremental reform. As our preview noted, both areas are key to China’s domestic demand in coming years. The communique provided few details, so the Decisions document will be very important here.
- The property sector did not receive much attention. The communique mentions housing in the section on the current economic section, and in the context of managing economic risks. This would seem to imply that Beijing is still figuring out its long-term strategy with respect to the sector, including the shift towards state-subsidized affordable housing, but Xi clearly does intend for real estate to be a major growth driver. The main goal here is to limit further downside risks.
More analysis to come as details are announced.
