A Communique issued from the Party’s Third Plenum offers a preliminary view of China’s ongoing structural transformations without directly addressing urgent problems of deficient demand.

The Communique’s focus on continuity is unequivocal. As expected, it signalled that the Xi Jinping administration will remain focused on the structural supply-side transformations that have defined his administration, while solving the demand-side problems weighing on economic growth remains a distant and uncertain outcome.

The Communique was issued after three days of private meetings. A press conference tomorrow, led by Office of the Central Financial and Economic Affairs Commission Deputy Director Han Wenxiu, will unveil additional details ahead of the expected full policy plan next week.

 Earlier this week, Qiushi, the Party’s most authoritative theoretical journal, published a collection of Xi quotes entitled ‘We Must Maintain Confidence and Self-Reliance.’ Each quote focused on the importance of China remaining confident in choosing its own development path.

The message is clear. Doubters of Beijing’s development agenda will not be appeased. The leadership believes that only technological innovation agenda, and the construction of a ‘whole nation’ economic framework to support it, can lead China out of its present difficulties. Opportunities for a change in direction are increasingly scarce.

Science & Technology

Unsurprisingly, the Communique declared science and technology “the basic and strategic support for China’s modernization.”

"New quality productive forces", the Party’s recent catch-all term for its tech-innovation agenda, are to be supported through improved “institutions and mechanisms.” What these consist of will come into clearer focus next week. 

For now, suffice to say that the Plenum has signalled continuity in the development of a ‘whole nation’ system that supports long-term increases in technological innovation.

The Communique did outline one area of focus. The paragraph dedicated to science and technology repeatedly emphasised education, calling for “comprehensive reform of education”, “strengthening the country through talents” and promoting “the reform of the education, science and technology, and talent systems and mechanisms.” This aligns with Enodo's prediction that reforming the education system to support technology innovation would be one of the meeting’s core goals.

Guiding the Market

Discussion before the Plenum centred on how the meeting would seek to restore confidence to the country’s moribund private businesses.

Xi himself stated in early June that the country must remove “obstacles restricting the fair participation of private enterprises” and “support the development and growth of the private economy” to build “a high-standard market system.” But these statements sat alongside reiteration of the need to improve state supervision of private businesses, and enhance “the leading role of party building.”

Enodo argued that the mixed messages indicated the government’s intention to construct a system of ‘managed competition’, similar to that which exists in the public sector. The Communique’s unequivocal focus on enhanced government guidance of the market system supports our view. 

Beijing will seek to “unswervingly… guide the development of the non-public economy” and “better maintain market order and make up for market failures.” But most supportive of our argument is that the government will “let the market go” while “keeping it in check.” There may be some loosening of control for private enterprises within industries deemed to be operating in line with national objectives, but the state will remain ever present and ready to intervene if this is no longer the case.

The Communique also contained reference to the construction of a national unified market, as we also predicted. Its inclusion in the headline Communique suggests it will be a top priority for the next five years,  although details of how this will be advanced will wait for next week.

Financial Reform

Enodo’s recent trip to China underscored the depth of recent reform in the financial sector. Monetary policy and the banking system are both being reoriented towards more effective support for the government’s development goals.The Communique reiterated that these reforms will continue, though without much hint of specific focus areas. 

Improvements will be made to “the macroeconomic regulation system”, with promotion of reforms to “finance and taxation”, as well as more consistent “macroeconomic policy orientation.” The lack of direction in these pledges means they will be among the most interesting components of next week’s plan. 

Taxation reform was expected to feature prominently at the Plenum, with local government fiscal burdens necessitating serious reform if public services are to be improved, as is pledged elsewhere in the communique. And monetary and financial reform are equivalently important, with many areas of the economy in dire need of greater monetary support and the finance system a key player in the government’s repeated promise to optimise the allocation of resources.

Opening to the Outside

The Communique reiterated China’s commitment to opening, which it called a “distinctive feature of China’s modernisation.” Such calls are a common watchpoint for foreign businesses in China seeking signals that their presence is welcome and encouraged.

But Enodo is skeptical that the government’s commitment to opening relates to foreign investment any longer, as China most benefits from opening by having its own domestic companies become internationally competitive. The Communique’s calls for reliance on China’s “super-large market advantages” and system reform in ‘foreign trade’, ‘foreign investment’ and ‘outbound investment’ are just as likely intended to supports domestic companies’ outwards expansion than they are a re-commitment to attracting foreign capital and companies.

Rhetorical persuasion will likely continue to come and go in response to foreign business sentiment. But we expect next week to confirm that opening has taken on a very different meaning than in the pre-Xi era.

Urban-Rural Reform

In our Plenum preview, we projected that household registration system reform will be a major focus of reform for the next five years.

The Communique made no specific mention of this, instead choosing a broader call for better integrated development of urban and rural areas. Most intriguing is the pledge for “equal exchanges and two-way flows of production factors between the cities and the countryside.”

Household registration reform is one obvious method in which exchanges could be equalised, with freer labour supporting better production flows. But conclusions will have to wait until next week, when the fuller Plenum plan is released.

Personnel

Finally, the Communique announced the resignation of disappeared former Foreign Minister Qin Gang from the Party’s Central Committee. It referred to Qin as ‘Comrade’, indicating he retains his party membership. Qin is unlikely to return, but the update suggests his status may be more benign than expected. The soft-landing implied here is also in line with information communicated to Enodo by a senior Chinese official at the end of 2023. The mystery continues.....

Defence Minister Dong Jun was not promoted to the Central Military Commission, a position his predecessor Li Shangfu held before his recent downfall in relation to corruption in the PLA’s rocket force. With the Communique also calling for improvement to “the systems and mechanisms for leading and managing the people’s armed forces”, his lack of promotion may indicate that Xi wants to retain a hands-on approach to resolving the scandals that have loomed over the army in the last year.

Conclusion

As if it was ever in doubt, the Third Plenum offered only retrenchment. 

The slow program of institutional reform in support of tech-innovation that has become Xi’s calling card will continue for the next five years.

Many of these reforms still require greater clarification. Unifying the market is a straightforward objective, even if it will face considerable resistance at the local level. But how government "guidance" of private enterprises will co-exist with equal treatment of the private sector is an ongoing concern.

This Communique offered no comfort for more urgent concerns about consumption, debt-deflation, or the state of the real estate market. For these, Beijing is asking for greater patience than many will be able to bear.

Enodo will return to the Third Plenum next week, when the release of the fuller plan enables us to dive deeper into what it means for the next five years.