On July 18, the Central Committee of the Chinese Communist Party (CCP) concluded the Third Plenum of the 20th Party Congress. The Third Plenum traditionally has tackled economic issues, with several past Third Plenums leading to roll outs of major economic policies.
Typically held in the fall, this Third Plenum was delayed for several months, as China’s leaders grappled with a slowing economy. At its conclusion, the 20th Central Committee of the CCP issued a communique which adopted the “Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization” (中共中央关于进一步全面深化改革、推进中国式现代化的决定) On July 21, the CCP unveiled the decision document, which sets forth in greater detail the Party’s economic plans for the coming years.
Below, three Fairbank Center faculty react to the Third Plenum and offer their thoughts on its implications for China’s economics, politics, and trade relations in the years ahead.
Anthony Saich: Authoritarian Populism Re-Confirmed
While Xi Jinping established his political legacy at the 20th National Congress of the Communist Party in October 2022, its Third Plenum confirmed his approach to economic and social development, what might be called authoritarian populism. The Plenum Decision casts the meeting in the same historic vein as the Third Plenums of the Eleventh (November 1978) and the Eighteenth Central Committees (November 2013). However, it is worth remembering that certain key reforms associated with Deng Xiaoping, such as the ‘open-door policy,’ were not in the 1978 Decision, and even though the current plenum announced that the tasks set by the 2013 Decision have been completed, the work of the Rhodium group has shown that a number of key reform measures have actually regressed.
Essentially, the Plenum pulls together Xi’s major policy statements into one document. Thus, the Decision touches on the right topics: high quality development, combining development with security, defusing risks in real estate and local government debt, ensuring technological self-reliance, grappling with the skewed income distribution, and improving urbanization by integrating the urban and the rural more effectively. All the challenges are to be met by 2029. However, we get few concrete proposals. It is a political document to rally the system behind Xi’s preferences.
Thus, Xi’s and the Party’s dominance runs through the document. The first principle is upholding the Party’s overall leadership. However, in a possible sign that unease persists, establishing Xi’s core position on the Central Committee and the Party as a whole is stressed, something that has been signaled for some time. Further, the Communique calls for dealing effectively with risks in the ideological domain, while improving ‘public opinion guidance.’
The Decision contains the usual policy tensions, such as maintaining Party control while encouraging innovation, offering greater consolation to the private sector while viewing the state sector and state finance as the principal driving forces for the economy, and balancing the role of the market with state guidance. Some proposals might conflict with other aims. The need for high quality development is stressed as the way to move up the value-added chain, increase total factor productivity, and develop cutting-edge technologies for the future. This will be aided by enhanced attention for science, technology, and education. One problem is that the overwhelming majority of the population are not, and will not, be employed in these advanced sectors, undermining Xi’s determination to improve income inequality.
On the populist side of the equation, the Decision calls for more inclusive public services that will meet the most essential needs, while providing a cushion for those most in need. Inequality has become a major concern for the Party leadership, as an increasing number of people see a reduction in their life chances and the inequality stemming from institutional factors rather than individual capabilities. The most glaring inequality is driven by the differences between rural dwellers and their urban cousins. Consequently, the Decision calls for improving the process of urbanization and creating more effective urban-rural integration. A key component of this will be eliminating completely the system of household registration that disfavors rural dwellers.
Finally, there is the thorny problem of dealing with local government debt, fueled by unfunded or inadequately funded mandates. Again, the problem is recognized, calling for a better fiscal relationship between the Center and local governments with a clear division of powers and responsibilities that would permit an appropriate allocation of resources. Importantly, more fiscal resources will be placed at the disposal of local governments with their sources of tax revenue expanded. One waits for further details as a concrete plan was put forward to be completed by 2020. We are still waiting.
In conclusion, the Plenum marks a confirmation to Xi’s approach to development but offers little by way of detailed proposal. Industrial policy and supply side reforms remain the key, with no indication of a shift in the development strategy that would encourage consumption to become a driving force in the future.
Meg Rithmire: National Security-Driven Industrial Policy Marches Ahead
At the beginning of Xi Jinping’s first term, in 2012 and 2013, I recall hearing from many in China and abroad that the anti-corruption campaign that was Xi’s first priority might pave the way for fundamentally liberalizing economic reforms. The 2013 Third Plenum Decision seemed evidence of liberalization, as Xi outlined an ambitious effort to make markets the “decisive force in allocating resources” as well as plans to overhaul the urban/rural divide and rebalance the economy toward consumption and innovation. In the years that followed, however, and in response to domestic and international events, the political economy under Xi became less market-driven and more centered on issues of regime security.
My co-authors and I have documented China’s political economic transformation into what we have called “Party-state capitalism,” marked by an emphasis on national security and renewed means of state power in the economy that erode the boundaries between private and state firms. Though the Chinese Communist Party does not enjoy control over all, or even most, non-state firms, the rise of techno-industrial policy—a suite of laws that appear to give significant grounds for the state to intervene in firms, waves of crackdowns on large and small firms, and efforts at civil-military fusion—have elicited backlash in other countries, especially the United States and its allies, and blanketed the Chinese economy in a chill that has significantly slowed China’s growth for the first time in a generation.
To be fair, many of China’s economic problems, including demographic change, the long-awaited consequences of local government and household dependence on the real estate sector, and fiscal policies that overburden local governments and under-insure Chinese households, are structural and cannot be pinned on Xi. Observers of Xi’s third term may have hoped for a 2024 Third Plenum decision that would signal structural change to meet these challenges, but they would be disappointed by the text of the Decision as well as the general policy direction. What the Chinese economy needs is not entirely a mystery; former Finance Minister Lou Jiwei has long advocated fiscal reform (his program would have centralized expenditures, though others have advocated diversifying and strengthening revenue sources for local governments), and households might spend more to boost consumption if public services and social welfare nets were expanded.
Instead, the Third Plenum reiterates Xi’s emphasis on security, adding the slogan “New Quality Productive Forces” to a slew of Xi era slogans (“Supply Side Reform,” “Common Prosperity”) that seem to signal rebalancing and change but nonetheless continue a familiar investment-driven growth model. The industries targeted for investment are ones critical to “national security” and high-tech, familiar ones from the 2015 Made in China 2025 program. These industrial policies have achieved massive capital flows to specific sectors but have also attracted the ire of trade partners when that investment generates oversupply. Between the political “malaise” that has characterized China’s post-COVID economy and society and the continuing securitization of the economy, the Third Plenum provides only evidence that Xi’s economic policies march on in the same direction.
Mark Wu: Doubling Down, with More Trade Tensions to Come
China’s decades-long growth model has run its course. For years, Chinese “financial repression” facilitated access to inexpensive capital, leading to impressive investments in infrastructure and other hard assets. This gave rise to fast productivity gains and export prowess. Over time, however, structural problems have accumulated. China’s economy no longer required, nor could it productively absorb, the high levels of investment that it once needed. But China’s leaders so far have chosen to avoid the difficult task of addressing systemic issues head-on and re-balancing the economy toward demand-led growth. Instead, their monetary and fiscal policies helped inflate a property bubble, which has finally burst.
The aftermath of any economic bubble involves economic pain. China’s hope has been that such pains can be absorbed slowly over time, while it cultivates new engines of growth. To do so, the government’s game plan has been to redirect investment toward the manufacturing sector. In particular, the emphasis has been on the so-called “new quality productive forces,” a slogan meant to capture emerging innovation industries such as electric vehicles, AI, biotech, nanotechnology, and renewable energy. This term features prominently in the Third Plenum documents.
China’s strategy to innovate one’s way out is bound to give rise to trade and geopolitical tensions. With domestic demand weak, increased investment gives rise to overproduction. The surplus goods need to be sold somewhere outside of China, through exports; otherwise the strategy won’t work. When the Chinese economy was relatively small, the rest of the world could absorb China’s increased exports. Some might even welcome its consumer benefits. It is foolish to think that is still the case.
With China already accounting for over 30% of global manufacturing, its recent production boom has been unwelcome and worrying. The U.S. already has raised tariffs in response, with the EU soon to follow for electric vehicles. Hopes that the developing world might welcome cheap, innovative, Chinese products are also proving to be misguided. Larger developing countries are intent on pursuing their own industrial policies for emerging sectors and on protecting their own manufacturing industries. Brazil, India, and Indonesia have all slapped tariffs on Chinese products recently; others likely will follow. Each country is seeking for the costs of the next wave of the China shock to be borne elsewhere, rather than by its own economy.
While few expected that this Third Plenum would offer any major course correction, what is striking about the document is how much China is “doubling down” on its strategy. Despite strong warning signs that continued investment in manufacturing will give rise to increased trade tensions, China’s leaders are determined to stick to their course. They are betting that the rest of the world, like it or not, won’t dare to escalate a trade war enough to cripple Chinese firms in the near-term. And in the medium-term, they are betting that their investments and industrial policies will lead them to dominate at least a few of the emerging industries on which they’ve placed bets.
Of course, the Third Plenum document left open the possibility that we may see more incremental policies to address China’s weak consumption. Chinese reforms historically have emerged gradually, through experimentation. Open questions remain over what types of policies exactly will be implemented to redress the alarmingly uneven distribution of economic gains. But so far, there appears to be little indication of an appetite to tackle the major systemic issues, including the moral hazards facing the financial industry, domestic mobility restrictions, and the adjustment of balance sheets in light of recent excessive liquidity. So long as that holds true, for the rest of the world, overproduction worries will remain paramount.
The upshot is that China’s desire to slow down the adjustment pains for its domestic economy comes at a cost for global geopolitical stability. The Third Plenum indicates that when faced with a choice of slower growth or an escalating trade war, China’s leaders are more willing to accept the latter. Of course, neither are outcomes that they desire. But more trade wars are likely on the horizon in the years to come.