The Third Plenum was mainly about politics, not economic reform.

In the face of continuing, systemic economic drags in China, highlighted by the publication of weak second quarter growth,  the authorities moved swiftly after the end of the Third Plenum of the 20th Central Committee in mid-July to demonstrate a sense of concern.

The Third Plenum was not oblivious to the plight of the economy and to the frustrations that many Chinese households and firms must be experiencing. China’s economic growth has slowed significantly, needs regular stimulus to meet government GDP growth targets, and is experiencing numerous systemic problems including  stalled productivity growth, over-investment, misallocation of capital in infrastructure and housing, a rising burden of debt, a boom-to-bust property market and high youth unemployment.

On the Monday following the Plenum, deposit and lending interest rates across the board were lowered for the first time since August 2023. Rates are already low, the changes were small, and more monetary easing is coming, even though interest rates are not why China’s economy is labouring, and won’t help much.

A week later, at the July Politburo meeting, the government said it would need to do more, using ‘countercyclical measures’ to hit its 5 per cent GDP growth target, and use monetary and budgetary policies to spur consumption. This seems to suggest there will be additional measures to promote sales of homes and consumer appliances, and to provide more for child and elderly care. None of this is new, even if it is more urgent, and there is no coherent plan to bolster household incomes and welfare so as to boost consumption.

On 1 August, the State Council announced an urbanisation plan to raise the urbanisation rate from 66 to 70 per cent over the next five years, entailing further relaxation of ‘hukou’ urban residency permit policies, which, technically, could boost consumption by making social, housing, and education benefits available to more migrants workers. Yet, the effect of urbanisation is now much weaker than it once was because the population is now stagnant, and importantly because much urbanisation will be ‘checked’ via reclassification of districts rather than people moving physically to higher paying jobs, and increased consumption and productivity. Moreover, there is no indication how financially stressed local governments will be able to pay the bills.

These are early post-Plenum days, and the rush to judgement should be tempered. That said, there is nothing in the Plenum discussions and documents to suggest the Party takes any responsibility for past economic policy shortcomings or failures. More importantly,  there is little from which one might deduce that the government plans or even wants to reform China’s economic model and structure, as many economists inside and outside China have urged,  so as to better serve the lofty goals to which the Party aspires.

Reading the Plenum’s tealeaves

Just as recent Party conferences and events have suggested, the Plenum confirmed that national security is as important as the economy, perhaps more so. In a separate ‘explainer’ document, Xi Jinping says that  a ‘higher priority to national security provides a pivotal foundation for ensuring steady and sustained progress in Chinese modernisation’, and that China’s industrial system – in which manufacturing accounts for about 29% of GDP and a third of global manufacturing – suffers from ‘over-reliance on key and core technologies controlled by others’.

By establishing the fusion of the economy with national security, Xi can add ballast to his claim that the Chinese people now prioritise the quality over the quantity of economic growth, which is to say that they will be content with lower economic growth. Moreover, this linkage also justifies the government’s insistence about what reform means. Rather than implying market, possibly destabilising reforms, and those that might give a nod to individual effort and initiative, and actually threaten to Party’s political primacy, reform is about measures to bolster the Party and state, and to prioritise Party-lead industrial policy, and so-called, supply side structural reforms, rather than demand and redistribution policies.

The Plenum made clear that the Party has three broad goals in its longer-term strategy to become a  ‘high level socialist market economy’ by 2035

• to improve people’s livelihoods and income distribution, lower inequality, and provide some social welfare benefits. These nods to ‘Common Prosperity’ could also provide for previously mentioned changes to the ‘hukou’ residency permit system
• to pursue ‘socialism with Chinese characteristics’, including by focusing on the governance regimes in which in which market mechanisms and private forms are permitted to operate but in an environment dominated by the public sector and state firms whose goals are paramount
• to follow a path, above all, towards ‘high quality development’, or, put another way, to implement industrial policy and the allocation of state capital in order to lead in new technologies and advanced science

China invoked the concept of strategic emerging industries several years ago, and has refined them subsequently to include information, communications and technology hardware, industrial machinery, biotechnology and pharmaceuticals, clean energy and electric vehicles, artificial intelligence, digital media, space, networks, life sciences, and nuclear. These will be centre-stage for state enterprises and for the funding and involvement of compliant private firms, and are expected to develop capacity and ability to reduce dependence on American and other western firms.  Xi’s belief is that if China can dominate the so-called fourth industrial revolution, it can bring to an end US leadership in the global system.

Geopolitical and economic ambition, therefore, are inseparable for Xi, and seen in this light, the government’s view at the Plenum seems clear. Apart from the Marxist and Leninist objections to a western emphasis on consumption, welfare systems and service producing industries, it also wants to double down on industrial policy and supply side economics for national security reasons and because it thinks this will deliver collective benefits to citizens.

For Xi this is what matters. For many economists looking at China’s prospects, the failure to substitute consumption activity for embedded inefficiencies in over-investment, and reliance on huge trade surpluses is both bewildering and in all likelihood, risky for China.

In any event, there is absolutely no guarantee that Xi’s industrial policy strategy will work, even in some firms benefit and a few national champions are created. To be sure, China has a credible and envied record of having become the world’s premier manufacturing nation, accounting for about a third of world value added,  and the centre of many manufacturing supply chains. There are many questions, or reservations, however,  about efficiencies and profitability, innovative capacities in several important fields, reliance on crucial imported technologies, and the effects of over-centralisation and a repressive governance environment.

Moreover, the external environment is quite different from anything seen in the last decades, and getting worse as export controls, sanctions, and fragmentation of commerce, investment and standards proceeds.  China’s increasingly mercantilist emphasis on balance of payments surpluses and expensive industrial policies, and the capacity and trade distortions arising are getting more and more resistance, and not just from the US, the EU, Japan and Australia.  Pushback from other nations, for example, Brazil, India, Indonesia, even Malaysia, and Turkey, against Chinese trade practices now seems to be on the increase. It seems that China may come up against barriers from foreign states.

The bigger barriers though may come from within China. There is a growing urgency for the government to address the macroeconomic imbalances and distortions that have emerged over the years, the structural downturn in real estate, the dysfunctional nature of finances between central government and local governments that are responsible for most public goods and services provision, and other macro phenomena such as the deflation risk arising from under-consumption or over-investment.

Industrial policy is no panacea or substitute for the kind of macroeconomic policies and reforms that are required. The Third Plenum rang hollow in this regard, largely because such economic transformation would need political reforms that the Chinese Communist Party cannot embrace.

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This article gives the views of the author, and not the position of the China Foresight Forum, LSE IDEAS, nor The London School of Economics and Political Science.

The cover image “Great Hall of the People At Night by Thomas.fanghaenel, licensed under CC BY-SA 3.0, via Wikimedia Commons