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China downplays hopes for ‘strong medicine’ at key economic policy meeting

Peng, an employee at a state-owned Chinese media outlet in Beijing, is in shock after being forced to accept a second pay cut in less than a year, as the country’s weak economy affects even government-owned companies.

“I can barely live on this,” she complained. “The work keeps growing, but the money keeps shrinking.”

Peng’s situation, which is echoed across China as the economy struggles to recover from a housing slump and the pandemic, illustrates the challenges facing President Xi Jinping’s government as it prepares for one of the Communist Party’s most important five-year meetings this month.

In the past, the Chinese Communist Party has used the third plenary session of its Central Committee, an elite governing body, to address the most important economic issues of the day. In 1978, Deng Xiaoping used the meeting to launch China’s post-Mao Zedong “reform and opening up” campaign.

Some experts say similarly bold action is needed now to boost domestic demand and prevent the world’s second-largest economy from slipping 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 there would be no shock therapy.

In the face of the pandemic, China’s economy has been like a patient recovering from a serious illness, Li said. “According to Chinese medical theory, we can’t use strong drugs at this point. We should fine-tune and slowly nurture (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 economic growth in the first quarter was solid, at 5.3% from a year earlier. Growth was driven by manufacturing and industrial production, although consumer spending remained weak.

Analysts are examining recent speeches by Xi Jinping and other leaders for signals about Beijing’s policy direction for the next five or more years that could be revealed at the meeting, which will be held July 15-18.

Possible areas of focus include Xi’s “new qualitative productive forces,” which analysts say means high-tech, green energy sectors and improved manufacturing in party jargon, as well as fiscal and social reforms, changes to China’s system hukou household registration system and measures to rebuild private sector confidence.

The central committee — which currently consists of 205 regular members and 171 alternates appointed at the 20th party congress in October 2022 — typically convenes seven plenums during its five-year term. The third meeting has attracted particular international attention because of its earlier statements on economic policy.

“The underlying assumption is that this third plenum will not represent a fundamental departure from the course Xi has already charted,” Gavekal analysts Andrew Batson and Wei He said in a research note.

“Its official goal is to explore ‘the development of modernization along Chinese lines,’ which Xi calls the realization of a vision of national greatness in which technological self-sufficiency and national security take precedence over economic growth.”

Xi has prioritized industrial production in high-tech sectors such as electric vehicles, batteries and semiconductors to boost China’s economy © Stringer/Reuters

The new productive forces are one such example. Xi this year linked his industrial production strategy, which has prioritized investment in sectors such as electric vehicles, batteries, semiconductors and biotechnology, to the concept of total factor productivity, a measure of economic performance not driven by growth in inputs such as capital and labor.

That has raised hopes among economists for a more market-based approach to growth. But Gavekal argued there is no sign that the state will reduce its role in the economy. Beijing still wants to “guide resource allocation to achieve the policy goals of industrial upgrading and technological innovation,” Batson and Wei said.

Analysts in Beijing, however, say fiscal reform is an area where change is possible.

China’s central government accounts for only about 10 percent of total government spending, compared with a global average of about 20 percent. Yet Beijing controls a disproportionate share of revenues compared with local governments. This has contributed to a debt crisis for many local governments, which have struggled to raise revenues in the face of a housing crisis.

“The main direction of the reform to be introduced is to increase the share of central government expenditure in the expenditure of the entire country,” said economists from one of the government-affiliated think tanks.

When it comes to pension reform, companies will be closely monitoring any signs of delays in retirement, which is among the lowest in the world at 60 for men, 55 for women in white-collar jobs and 50 for women in manual jobs.

Experts warn that as demographic decline continues (China’s population fell for the second year in a row last year) policymakers need to find ways to ease the growing fiscal burden of paying pensions.

Further relaxation hukou The household registration system — which restricts people from fully accessing public services outside their hometowns — could spur further urbanization and help the struggling real estate market.

Some observers, however, said Xi was unlikely to completely dismantle hukouwhich prevents overcrowding in “first-tier” cities, especially Beijing and Shanghai, and gives the party control over population flows.

Some entrepreneurs are counting on private-sector incentives, such as lifting limits on foreign ownership in some industries, to revive sentiment weakened by a crackdown on the real estate and e-commerce sectors.

Others are still seeking a decisive response to the housing crisis. The government has launched plans to intervene directly in the market by buying unsold stock, but its measures have failed to boost confidence. The third plenum could be a good forum for a “big bang” announcement on housing, some analysts have suggested.

“In an optimistic scenario… the third plenum could suggest or even implement a firm policy,” said Yifan Hu, chief investment officer at UBS Global Wealth Management.

Most observers, however, admit that this is unlikely, cautioning that the main goal will be to maintain continuity as Beijing tries to move from a debt-based economy with high growth, driven by real estate and infrastructure, to one characterized by investment in high-tech industries and a green transformation.

“We shouldn’t expect too much from the third plenum,” said one prominent economist from a government think tank.

The economist added that markets were already expecting a muted meeting. Stock indexes in Shenzhen and Shanghai have fallen 1.6 percent since Li Qiang’s remarks in Dalian.

For Chinese citizens seeking relief from pay cuts and job losses, this is not good news. Peng, the state media employee, said the savings were visible at all levels of her organization.

One of her bosses recently had his pay cut by 35 percent, leaving him “unable to make his monthly mortgage payments,” she said.

Breakthrough Events at China’s Third Plenum

1978

Considered a turning point in the history of the Chinese Communist Party, the 11th Third Plenum in 1978 installed Deng Xiaoping as China’s supreme leader and ushered in an era of “reform and opening up” that ended Mao Zedong’s planned economy and led to rapid economic growth.

1993

Jiang Zemin, former general secretary of the Chinese Communist Party, called for the establishment of a “socialist market economy” by the end of the 20th century and introduced reforms to encourage private enterprises and change the operation of state-owned enterprises

2013

The first third plenum, chaired by President Xi Jinping, reaffirmed the “decisive role” of the market in allocating resources and included moves 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 recent Third Plenum, held unusually early in the term, approved reforms to party and state institutions and strengthened Xi’s position after the party announced a constitutional amendment abolishing presidential term limits, paving the way for Xi to rule for life