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Alicia García Herrero (Natixis) | Despite everything, China’s long-awaited third plenary session is already over. Four days of high-level meetings (July 15-18) between Party leaders ended with a strangely confusing reading of the meeting. The press conference on July 19 failed to mitigate the general impression. from Chinese observers of an uneventful demonstration, although three hundred reforms were indexed through official media, but most of them are already underway.
As for the third plenary session after President Xi Jinping’s leadership, expectations were high because it was understood that the first (in the spring of 2014) could only set the tone for his mandate, as he had just been appointed. In 2018, Xi focused more on lifting term limits set out in China’s constitutional charter for his re-election than on reforms. This Third Plenum was the first under an omnipotent Xi, without term limits, but also the first after the Covid pandemic, which highlighted the persistent imbalances in the Chinese economy, specifically with regard to the very low contribution of personal consumption to growth. It is also true that from the first plenum under Xi to this one, the external environment has deteriorated quite dramatically due to a much more competitive US leadership, whether it is Trump or Biden.
In this context, the report and the press conference that followed the Third Plenum emphasize the difficulties of the external environment for China, but also recognize three key national challenges, namely a struggling real estate sector, weak government finances and systemic monetary risk. Three measures stand out from the indistinct survey. Firstly, the drive towards faster urbanization, through the transformation of rural land into urban land. Secondly, the centralization of fiscal policy and, thirdly, the greater emphasis on innovation and scaling up.
Regarding the first point, the reform of the territorial formula occupies a vital place in this reading with the aim of accelerating urbanization. Accelerating urbanization is expected to create more infrastructure needs and continue to move low-productivity workers from rural spaces to cities, thus encouraging expansion. The second, tax reform, was discussed as part of a “national strategic plan formula” aimed at further centralizing fiscal responsibility and reducing local government spending. The desire to improve local government finances is vital and pressing given the huge imbalances between local government profits and expenditures, that is, given the collapse of asset investment since mid-2021, but the direction given in The Plenary report may also be problematic. . Greater centralization of public spending would likely have implications for a number of key issues, such as how China conducts trade policy or spends on studies and development, which has long depended on the festival between local governments. The third and final topic of the reading was innovation and trade policy. This is not unexpected, since the advancement of “new quality productive forces” already occupied a prominent place on the political schedule a year before the plenary session. But two expressions stand out from the document: “the new formula to mobilize resources on a national scale to achieve key technological advances” and “talent. ” It is difficult to know if the “new formula” is really new or if it is more of the same, that is, following a trade policy focused on innovation, but what is transparent is that Chinese leaders are quite happy with their offer. centric approach. expansion model, regardless of court cases from the rest of the world, from overcapacity to dumping of reasonable exports in the global trade formula. The explanation probably lies in the urgency with which Xi Jinping wants China to reduce its technological dependence on the United States and become self-sufficient. Furthermore, innovation is expected to improve productivity and thus mitigate the negative effect of aging on expansion.
Given the three responses to the three challenges, China obviously seeks to mitigate its structural slowdown, through urbanization and increased trade capacity supported by innovation, while making its public finances and adaptation more self-sufficient. The hope is that those three measures will create a virtuous circle through which the systemic threat related to real estate, but also to local authorities, will be reduced.
While we wait to be informed about the main points of the reforms that Chinese leaders are dedicated to implementing at this Third Plenum, the first impression is that the measures mentioned will probably not be enough to solve China’s economic problems. First, China’s economy wants to regain momentum, but customer and investor confidence is unlikely to be restored by such measures. In fact, no express reform has been announced to reduce excess savings and family consumption. This would require the creation of a well-functioning welfare state, which does not appear to be a component of Chinese leaders’ plans. Secondly, and similar to the first point, there appears to be no fear about China’s manufacturing development without a domestic call while protectionist forces oppose Chinese imports. Finally, China’s personal sector is sometimes more productive than state-owned enterprises, but the Chinese government is increasingly putting pressure on it through stricter regulations and other types of repressive measures. The reading does not seem to give any indication of a change of course, but quite the opposite, omitting the adjective “decisive” when talking about the role of the private sector in relation to the rebounds of 2013 and 2018.
Overall, the “Third Plenum” that has just ended obviously did not replace the stage in terms of announced reforms, especially given the difficult situations that lie ahead both externally and internally. It turns out that the Chinese government prefers to get ahead by reinforcing its convictions. The challenge is that there is now a lot more dust to deal with.
Chirp