At China's upcoming Third Plenum, the Xi Jinping administration will focus on continuing the structural transformations that have become his calling card. But scant attention is expected to be paid to the immediate demand-side problems of bolstering the consumer economy.

The exact date of the Third Plenum remains unannounced, but its agenda is becoming clearer. Technological self-reliance will feature heavily as the central pillar of Xi’s enduring vision for development.

Yet the most interesting watchpoint will be how the Third Plenum addresses structural transformations and breaks the bottlenecks which threaten development.

These long-term objectives have so far had mixed success. Increased state control ('guidance' in bureaucratic parlance) over private business, the elimination of regional protectionism, the wider integration of rural residents into the economy, and tax reforms to improve local government finances all remain urgent priorities.

Much of the government’s ability to navigate present economic difficulties in the coming years will depend on these reforms. Yet success is far from certain.

Xi’s vision has pitted him against powerful vested interests. He has already successfully upended previous administrations' institutionalisation of government norms and consolidated the power needed to realise his agenda. But as the economy struggles, discontent is simmering underneath the surface.

Whether he manages to fully implement the Third Plenum’s reforms will determine whether his vision of high-quality development is ultimately achieved. 

In Enodo's view, success with these supply-side reforms will not be enough to place the economy on a sustainable growth path without the structural changes needed to create genuine consumer demand. Yet the majority of those are conspicuously missing from the discussion.

The Third Plenum in Perspective

The Third Plenum of Xi's first term, in 2013, laid out a program intended to salvage an economy that had become “unbalanced, uncoordinated, and unsustainable.”

Despite momentous economic change since, many of the government’s stated ambitions remain the same.

The 2013 meeting stressed the need to “balance… the role of the government and market” with “public ownership playing a dominant role and different economic sectors developing side by side.”

Xi has followed through on his promise. Strengthened state-owned enterprises (SOEs) have played a crucial role in developing the economies of scale necessary for industrial policy to succeed; and are increasingly used to control market movements, such as through the purchase of equities by the ‘national team’ or the use of banks’ FX holdings to intervene in the FX market. Private companies have been brought into line with government objectives through punishing regulatory campaigns and increasing Party penetration at the management level.

China’s technological self-reliance agenda has taken on greater urgency in the face of rising international protectionism, which in Beijing's eyes justifies the growing role of the state in the economy. Reforming the governing framework for public and private enterprises so they can contribute to this goal with maximum efficiency remains a crucial objective.

The 2013 Third Plenum also called for “the establishment of a unified, open, competitive and orderly market system.” This involved removing market barriers and raising efficiency and fairness of resource allocation.

It identified the dual urban-rural structure of the economy as a hindrance to integrated development, preventing rural citizens from participating in ‘modernisation.’ Untethering rural Chinese from the legal constraints that block them from full urban citizenship would, potentially, help on the demand side of the ledger, and yet there is apparently little political will on this front. 

Failure on these latter two points has been acknowledged. In October 2022, Yang Weimin, long-term aide to Liu He, the most senior official in charge of economic policymaking between 2017 and 2022, told financial magazine Caixin that “some hard reforms are yet to be carried out, and others are so controversial that there are not yet any implementation plans for them.”

During his previous two terms, Xi had to contend with other factions within the cabinet that may have disagreed with how such questions should be resolved. For this term, he faces no such barrier – since October 2022, it is his team.

Still, over time fresh disagreements are likely to spawn newer factions. The upcoming Third Plenum may be Xi’s only opportunity to advance his unfinished agenda with a free hand.

Comprehensively Deepening Reforms

The build-up to this Third Plenum has brought structural reforms back into focus. New ideological formulations – 'new quality productive forces', the 'new development concept' – that have resurfaced heavily in official speeches and publications reflect these structural concepts, suggesting an imminent effort to push them through.

The most important of these publications have come from Qiushi, the Party’s most authoritative theoretical journal. The most recent edition contained a compilation of Xi Jinping quotes on high-quality development and its requirements, alongside a longer essay on the same topic. It also included an essay outlining explicit reform priorities by Han Wenxiu, deputy director of the Office of Central and Financial Economic Affairs, which is overseen by the senior economic tsar, He Lifeng. Meetings of senior officials, including the Committee on Comprehensively Deepening Reform, have provided further signals of what may be announced.

Driving Innovative Forces

'New Quality Productive Forces' has been the preferred buzzword for Xi's economic agenda since he introduced it last September.

There is little doubt that technological innovation is at the core of these ‘forces.’

Xi has defined these 'forces' as being “born out of revolutionary breakthroughs in technology, the innovative allocation of production factors, and the in-depth transformation and upgrading of industry.” They will lead to a “significant increase in total factor productivity” by extending beyond emerging industries into traditional manufacturing.

Rhetorically, all of this is familiar. Xi has emphasised the importance of technology to China’s development since his first year in office. This has been reaffirmed in various guises since, with Made in China 2025 the most (in)famous.

The Third Plenum was, therefore, always likely to feature technology prominently. Han’s Qiushi essay suggests that the focus will be on educational reforms needed for long-term development of individual talent necessary for technological development. Better integration of R&D institutions – academic or industrial – may also feature prominently.

But Xi has set his sights beyond technology. The 'forces' he wants to unleash include “innovation at the management and institutional level.”

Beijing often introduces concepts that hint at the broad direction it wants to go in, while leaving space for policy circles to fill in the concrete details.

For now, Beijing may simply be acknowledging that focus on technology alone is unlikely to provide the economic boost needed to grow out of the constraints weighing on the economy.

Other reforms will be necessary to fully unlock the ‘new quality productive forces’, but they must be framed within the self-sufficiency drive to add extra urgency for local officials who may otherwise resist.

'Managed competition' for private enterprise?

The most important question in the development of ‘new quality productive forces’ is the impact on China's enterprises, both private and state-owned. The Third Plenum will once again put them center-stage.

On June 11, Xi hosted a meeting of the Committee on Comprehensively Deepening Reform. The meeting focused on “improving the modern enterprise system”, and called for both greater Party leadership over SOEs and internal governance reform alongside improved supervision of private businesses and “giving play to the leading role of party building.”

At the same time, Xi highlighted the need to remove “obstacles restricting the fair participation of private enterprises” and to “support the development and growth of the private economy” to build “a high-standard market system.”

These are mixed messages. Increased state supervision of private business is often viewed as antithetical to their fair market participation. Recent regulatory campaigns in China, whether wiping out after-school education or cracking down on internet giants, have left the same impression. As a result, business confidence remains low.

For Beijing, there is no contradiction. The SOE system of ‘managed competition’ is key to technological development goals, and private companies must fall either into line voluntarily or get herded in involuntarily.

Many of China’s central SOEs are now profitable, making up almost a fifth of Global Fortune 500 companies. They function primarily as holding companies for a large number of subsidiary operational companies.

Many of these subsidiaries are industry giants in their own right, some of which compete with each other for contracts. In theory, their parent SOE maintains a balance between them by allocating resources or re-assigning them across projects. At times, larger firms in the same sector are merged to bring competition in-house -- for instance, the merger of China's two largest train operators in 2015 following ‘vicious competition’ between them on an Argentinian government contract.

This ‘managed competition’ within giants is only increasing. The State-owned Assets Supervision and Administration Commission is responsible for 97 central SOEs, down from 196 at its founding in 2003, reflecting the degree of mergers in this sector.

For Beijing, competition within the structure of state guidance supports development goals. The companies at the core of its technological self-sufficiency drive are often private.

A typical example is Huawei, whose telecommunications technology is of such vital importance that its successes are often championed as nationalist victories. Other examples include electric vehicle giants BYD, Geely, and NIO.

This matters, because concerns regarding ‘vicious competition’ have resurfaced within the overcapacity debate. In early June, Geely Chairman Li Shufu complained that “endless involution and crude price wars” had resulted in “disorderly competition that does not comply with regulations.”

Just last week, the National Energy Administration announced it would intervene in the solar industry to prevent “fierce” competition leading to “repeated development” and “low-end capacity.” Over a decade ago, a damaging bout of overcapacity and competition in the solar sector wiped out several leading firms. 

The Third Plenum’s likely focus on ‘modern enterprise’ and ‘high-standard market’ systems could therefore advance an institutional framework of stronger state guidance and resource allocation, akin to that employed within SOEs.

In doing so, the government seeks to prevent wasteful ‘repeated development’  that impede the ability of ‘new quality productive forces’ to drive economic growth.

This is a precarious balancing act. Some private companies will benefit massively from state-subsidies and control. The country’s ‘Little Giant’ program, which channels subsidies to smaller firms to support innovation, has been crucial in advancing China’s self-reliance in low-hanging technologies. We expect such programs to continue and expand past the Third Plenum.

Businesses outside the scope of these programs will likely see little to no change to their overall environment, or even an increase in competition from the favored few.

There remains a substantial risk that private business confidence will become so damaged that the government will lose the ability to revive it.

Unifying China's Market

Another source of ‘repeated development’ is China’s fragmented internal market, often identified as a problem of internal ‘coordination.’

The Xi administration has advanced several initiatives to address this issue. These include the dual circulation plan – including a unified domestic market to propel demand – and projects to integrate high-performing regions, such as the Greater Bay Area.

Beijing has repeatedly talked about regional integration this year. December’s Central Economic Work Conference (CEWC) included it among its nine priorities for the year, and March’s NPC pledged to better advance regional development.

Most importantly, the April Politburo meeting that announced the Third Plenum called for “unswerving” efforts to construct a national market. Han Wenxiu’s Qiushi essay further identified ‘regional coordinated development’ as a major reform priority.

The seriousness of the problem is often overlooked. Much of China’s economy is organised around regional conglomerations that roughly overlap with military regions set up just after the civil war of the 1940s. Each has its own industrial champions, with near-monopoly distribution networks. E-commerce has breached some of these barriers, but not nearly enough to create a truly unified national market.

Such barriers create vested interests that have resisted attempts to dismantle regional protectionism, and COVID-19 delayed integration further. An April 2022 plan for national unity was eclipsed by lockdowns across the country before being revived last spring.

Xi now has the power to overcome vested interests. And overcapacity adds greater urgency to getting it done.

Inter-provincial competition to capture shares of emerging industries has often led to duplicated industrial capacity, that goes to waste as industries consolidate.

The renewed importance of industrial policy under Xi has made this problem more acute. The country cannot afford to waste resources through unnecessary inter-provincial competition when geopolitical pressure to contain China’s rise is intensifying.

The government itself has repeatedly identified overcapacity as a problem of ‘coordination.’

After December’s CEWC listed it as a major problem, the 2024 NPC Government Work Report pledged to “strengthen coordination, planning, and investment guidance… to prevent overcapacity and poor-quality, redundant development.”

In the face of international criticism, officials now mostly deny overcapacity is a problem. Han Wenxiu’s Qiushi essay is the latest example of this. But a problem does not disappear just because it is denied.

We expect that the renewed talk around the Plenum of regional coordination and a national market is intended to signify that the government’s push will be very real this time.

A unified national market has long been regarded as essential to “restoring the structural role of consumption in the economy.”

The long-term benefits are clear. But the fact that the push for a unified market is driven by supply side issues underlines how far Xi's administration is from the policies needed for demand-side growth.

The City Surrounds the Countryside

Improving rural living conditions has been a central social policy of the Xi administration. The Party positions his anti-poverty campaign as his crowning achievement, and 'common prosperity' remains an important goal for the achievement of socialist modernisation. Yet rural residents are still locked out of full urban citizenship, especially in the largest and most desirable cities. 

Domestic debates regarding the issue are often lively. Many academics have called for land reform, to allow for individuals to trade their government-allocated land. Such controversial moves are unlikely to feature at a time of such great political sensitivity.

Instead, the Third Plenum will likely focus on a perennial topic for reform – the household registration system.

Recent years have seen a progressive relaxation of the system, with one eye on its long-term abolition. Last August, the Ministry of Public Security ordered local governments to remove restrictions on migrants in cities with populations below three million, and relax them in cities of up to five million people. The changes affected all but China’s 23 largest cities. Zhejiang and Jiangsu followed suit by removing restrictions, except for their largest cities of Hangzhou, Nanjing and Suzhou.

The reforms are driven by an increasing official consensus that the system is a block on consumption. Last September, former PBoC governor Yi Gang said household registration reform was crucial to releasing consumption and boosting economic recovery.

Xi seems to have come around to the idea. At the 2022 Central Agricultural Work Conference, he stated that the full entrance into ‘modernisation’ of the country’s several hundred million officially rural citizens will “unlock enormous creative energy and consumptive potential.” Qiushi’s most recent issue reprinted the quote.

Han Wenxiu’s explicit call for deepened reform of the household registration system – and full access to urban public services for permanent residents, presumably regardless of hukou – signals its likelihood of featuring at the Third Plenum.

Will it have the desired effect? Enodo has long been sceptical of the potential for rural households to boost overall consumption without the support of urban households.

Growth in rural spending peaked long ago. The anti-poverty campaign relied on large wealth transfers of dubious long-term gain. Rural incomes have already been spent as a force that can rebalance growth towards consumption.

We will explore the impact of household registration reform on consumer spending in another report. For now it is enough to say that effects will take time to emerge – both because the re-emphasis on hukou reform reveals that local governments have clearly been dragging their feet, and because the positive impact on consumption is far from certain.

A Taxing Decision

Finally, the Third Plenum will likely unveil new tax reforms to address serious budget deficits at the local level.

The CEWC first proposed tax reforms in December. Finance Minister Lan Fo’an repeated the pledge in a March Qiushi essay, which promised to “optimize the allocation of fiscal resources and strengthen financial support for major policies.”

If pushed through, such reforms would partially reverse the most significant tax changes of the 1990s, when the central government centralised fiscal revenues to cover its increasing budgetary shortfall. This time, the situation is reversed. High local government debt and sluggish growth means many provinces and cities can no longer cover expenditure, including for basic services such as public transport or education. Some, like Guizhou Province, have even publicly called on Beijing for help (its online essay was soon deleted).

Pandemic-era spending, when local governments had to absorb the cost of vast enforcement campaigns while losing normal economic revenue, and the loss of land-related revenue as a result of property sector difficulty, have exacerbated the issues.

Finance Minister Lan’s comment that tax reform is necessary to ‘strengthen financial support for major policies’ takes on extra importance in this context. Take education, for instance. Reforming the education system to better support innovation is harder when local governments are unable to afford basic provisions.

So far in Xi’s tenure, proposed tax reforms have failed to get off the ground. A long-mooted property tax has never materialised, though the unification of national property registration in 2023 suggested preparatory work was still underway. The wide variety of debate regarding appropriate measures since the CEWC proposed tax reform suggests a lack of consensus on how to move forward.

The Third Plenum’s tax announcements will likely be limited in scope, or seek simply to encourage debate about what is needed.

Local fiscal issues are serious, and the drain on resources via central transfers is an irritating obstacle to better ‘resource allocation.’ Xi has the strength to push reforms through, once a structure is decided on.

Conclusion

The relentless focus on supply-side reform while praising frugality continues to undermine the ultimate success of Xi’s vision.

The Third Plenum will be a case of retrenchment rather than revolution. Xi established his ambitions long ago. He now has the power to undertake the structural reforms he believes necessary to achieve them.

But how to resolve continuing economic strains remains an open question. The government holds the firm belief that its agenda is the right one if only it can be carried through, and appears in no rush to address this immediate question. Yet optimism that unleashing innovation will resolve all problems may be misplaced.

Some issues, like shortfalls in local government expenditure, are so severe that a patient approach risks social discontent. And it will take more than rhetoric to convince consumers and businesses to spend again, but signs of action remain few and far between.

Once the Plenum concludes, Enodo will explore policies to boost consumption, their impact on growth, and what they should have done instead in greater depth.