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China plays down hopes for ‘strong medicine’ at key policy meeting
Peng, an employee at a Chinese state media outlet in Beijing, is reeling after being forced to take her second pay cut in less than a year as the country’s economic weakness hits even its government-owned companies.
“I can barely live on this,” she complained. “The work keeps piling up, but the money keeps shrinking.”
Peng’s situation, which is reflected throughout the China as the economy struggles to recover from the housing crisis and the pandemic, it illustrates the challenges facing President Xi Jinping’s government as it prepares to hold one of the Communist Party’s most important five-yearly meetings this month.
In the past, the Chinese Communist Party has used the third plenary session of its central committee, its elite leadership body, to address the most important economic issues of the day. In 1978, Deng Xiaoping used the meeting to launch China’s “reform and opening up” initiative after the Mao Zedong era.
Some experts argue that similarly bold action is needed now to boost domestic demand and prevent the world’s second-largest economy from falling into a deflationary spiral. But at a recent World Economic Forum event known as “Summer Davos” in the northeastern coastal city of Dalian, Premier Li Qiang signaled that without shock therapy would be disclosed.
Following the pandemic, China’s Economy It was like a patient recovering from a serious illness, Li said. “According to Chinese medical theory, at this time, we cannot use strong medicine. We must adjust accurately and slowly nourish [the economy]allowing the body to gradually recover.”
China’s economy has been hit by weak consumer and investor confidence, making it difficult to return to stronger growth © Vincent Thian/AP
China’s growth was solid in the first quarter, expanding 5.3 percent compared to the previous year, driven by industrial and manufacturing production, although consumer spending remained uneven.
Analysts have been scrutinizing recent speeches by Xi and other leaders for signs of Beijing’s policy direction over the next five years or more that could be revealed at the conclave, which will be held from July 15 to 18.
Possible areas of focus include Xi’s “new quality productive forces,” party jargon that analysts believe refers to advanced technology, green energy industries and improved manufacturing, as well as tax and social welfare reforms, changes to China’s hukou household registration system and efforts to reinvigorate private sector confidence.
The central committee — which currently consists of 205 full members and 171 alternates appointed at the party’s 20th congress in October 2022 — typically convenes seven plenums over its five-year term. The third meeting has drawn particular international attention because of past pronouncements on economic policy.
“The base case is that this third plenum will not mark a fundamental departure from the course Xi has already charted,” Gavekal analysts Andrew Batson and Wei He said in a research note.
“Its official agenda is to study ‘advancing Chinese-style modernization,’ a term Xi uses to pursue his vision of national greatness in which technological self-sufficiency and national security trump economic growth.”
New productive forces are one example. Xi this year linked his industrial production strategy, which prioritized investments in sectors such as electric vehicles, batteries, semiconductors and biotechnology, to the concept of total factor productivity, a measure of economic output not driven by increases in inputs such as capital and labor.
That raised hopes among economists for a more market-oriented approach to growth. But Gavekal argued there was no indication that the state would reduce its role in the economy. Beijing still wants to “direct resource allocation toward achieving policy goals of industrial upgrading and technological innovation,” Batson and Wei said.
Tax reform, however, is one area where there could be changes, analysts in Beijing said.
China’s central government accounts for only about 10 percent of total government spending, compared with a global average of about 20 percent. However, Beijing controls a disproportionate amount of revenue compared with local governments. This has contributed to a debt crisis in many local governmentswho have struggled to increase revenue amid the housing crisis.
“The main direction of the reform to be implemented is how to increase the percentage of central government spending in all the country’s spending,” said economists at a government-linked think tank.
Regarding pension reform, companies will be alert to any signs of delays in the retirement age, which is among the lowest in the world, being 60 years for men, 55 for women in administrative jobs and 50 for women in manual jobs.
As demographic decline sets in — China’s population shrank for the second year in a row last year — policymakers need to find ways to mitigate the growing fiscal burden of pension payments, experts warned.
Further relaxing the hukou household registration regime — which restricts people’s full access to public services outside their hometowns — could spur more urbanization and help the struggling housing market.
But some observers have argued that Xi is unlikely to completely dismantle the hukou, which prevents overcrowding in “first-tier” cities, especially Beijing and Shanghai, and gives the party control over population flows.
Some business leaders are hoping for incentives for the private sector, such as lifting foreign ownership limits in some sectors, to revive sentiments shaken by crackdowns in the real estate and e-commerce sectors.
Others are still seeking a decisive response to the housing crisis. The government has launched schemes to intervene directly in the market buying unsold inventory, but their measures have failed to boost confidence. The third plenary session could be a good forum for a “big bang” announcement in the housing market, some analysts have suggested.
“In a positive scenario… strong policies could be suggested or even introduced in the third plenum,” said Yifan Hu, chief investment officer at UBS Global Wealth Management.
But most observers admit that is unlikely, warning that the main focus will be on continuity as Beijing tries to transition from a debt-fuelled, high-growth economic model driven by real estate and infrastructure to one marked by investment in high-tech industries and the green transition.
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“We shouldn’t expect too much from the third plenum,” said a prominent economist at a government think tank.
The economist added that markets were already anticipating a muted meeting. Shenzhen and Shanghai stock indexes have both fallen 1.6 percent since Li Qiang’s comments in Dalian.
For Chinese citizens seeking relief from pay cuts and job losses, this is not good news. State media official Peng said austerity was evident at every level of her organization.
One of her bosses recently had his salary cut by 35 percent, which “left him unable to pay his monthly mortgage payments,” she said.
Notable events at the third plenum of China
1978
Considered a turning point in the history of the Chinese Communist Party, the 11th Third Plenum in 1978 established Deng Xiaoping as China’s top leader and ushered in the era of “reform and opening up” that ended Mao Zedong’s planned economy and led to rapid economic growth.
1993
Jiang Zemin, the late general secretary of the CCP, called for the establishment of a “socialist market economy” by the end of the 20th century and instituted reforms to encourage private enterprise and change the operations of state-owned enterprises.
2013
The first third of the plenum under President Xi Jinping affirmed the “decisive role” of the market in allocating resources and included measures to liberalize the banking system, encourage private investment in state-owned enterprises, abolish re-education through labor and ease the one-child policy.
2018
The most recent third plenum, held exceptionally early in the term, approved reforms to party and state institutions and cemented Xi’s status after the party announced a constitutional amendment to abolish presidential term limits, paving the way for Xi to rule for life.