What to Expect From the Third Plenum, China’s Big Policy Meeting
(Bloomberg) -- The Chinese Communist Party’s top ranks gather this month for one of the country’s biggest annual policy meetings, with everything from chip technology to land reform and a revamp to the nation’s biggest tax source possibly on the cards. What isn’t expected is the kind of major policy pivot that’s often been seen in the past.
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The so-called Third Plenum gathers some 400 government bigwigs, military chiefs, provincial bosses and academics in Beijing to steer the political and economic course. But investors this year have low expectations for the kind of Big Bang reforms that would revive market sentiment. A slew of official readouts, articles and state media editorials over the past weeks suggest instead a reinforcement of President Xi Jinping’s long-tern goals.
In a sign of the market’s gloomy outlook, MSCI Inc.’s key China stocks gauge fell into a technical correction last week, while a Bloomberg measure of developer shares has lost almost 30% from a May high. The yield on China’s 10-year bonds dropped to a record low on Monday amid pessimism about the domestic economy and expectations for further stimulus.
“Expectations are low so I don’t think it’ll create too much more negative surprise,” said Xin-Yao Ng, director of investment at abrdn. “I’ve no confidence to bet on” any big stimulus.
The party’s 24-member Politburo, led by Xi, on Thursday gave a big clue about the plenum agenda, announcing that a “resolution on comprehensively deepening reform and advancing Chinese modernization” will be submitted for endorsement by the party elite. The aim is to build the nation into a “high-level socialist market economy” by 2035.
JPMorgan Chase & Co economists including Haibin Zhu pointed out in a note last week that policy innovation at sessions over the past decades always coincided with a change in top leadership. “This is not the case this time,” they wrote.
Yet there may still be valuable indications as to how Xi’s philosophy of innovation-driven growth, risk prevention and common prosperity will affect official decisions in the coming months. And with expectations so low, any hints about addressing economic pains such as the property slump, financial stress at local governments and subdued domestic demand may boost markets.
Here are the main policies traders and analysts expect the meeting to shed light on:
Supply Chain Security
China has been pushing for a breakthrough in core technologies to ensure supply chain security as the US and its allies tighten bans on exports of key products like cutting-edge semiconductors to the Asian nation. Beijing also views technology innovation as a new long-term growth engine that could help shift away from the old playbook of debt-fueled infrastructure investment.
Technology self-sufficiency and modernization of the industry have been high on the task list in key government and party documents in recent years promoting Xi’s high-quality development concept. In an article published earlier this month in party magazine Qiushi, or Seeking Truth, Han Wenxiu, executive deputy director of the General Office of the Central Financial and Economic Affairs Commission, called for “deepening reform of the education, science and technology” and “promoting innovative development” to build a modern industrial system.
“The Plenum will likely sustain the economic framework that has taken shape in recent years: prioritizing chokepoints in supply chain self-sufficiency and tech innovation,” Morgan Stanley economists including Robin Xing wrote in a June 26 note.
Urbanization & Rural Reform
Despite decades of expansion, only about 66% of China’s total population live in cities, well below the more than 80% in many developed countries. That means urbanization will remain a key driver of economic growth and the government will need to resolve a spate of issues the process will generate.
The migrations of millions more farmers to jobs in cities amid Xi’s Common Prosperity push has reinforced the need to expand the social safety net and public services. That will require further loosening of restrictions linked to the hukou system — which registers every household and determines where people can live, work, go to school and claim benefits.
Rural land reform, which was discussed at previous third plenums, will likely accelerate. Allowing rural homes to be tradeable would free funds to finance public housing and the social safety network, and households and local government could share the revenue from the value increase in the land reform, the JPMorgan analysts wrote in their report.
These measures would be in line with the authorities’ goal of allowing the market to play a key role in allocating resources. Their successful roll-out could also slowly boost the spending power of consumers to help rebalance the economy.
Fiscal/Tax Revamp
For decades, China’s local governments have done most of the heavy lifting on growth-stimulating infrastructure spending. That may be reaching a limit after it led to a massive provincial debt pile, made worse by the property slump.
Economists have been calling on the central government to take on more expenditure to drive growth and to rejig the tax system to provide local authorities with more sustainable income flows. Chinese leaders at an economic meeting in December said they were contemplating a “new round of fiscal and tax reform,” sparking hopes that details may be unveiled at the plenum.
Some expect an overhaul of the consumption tax to broaden local authorities’ source of income, as well as further reforms of the value-added tax, the largest source of tax revenue in China.
For the longer term, a broad-based property tax and inheritance tax could be imposed and there may be more profit transfer and dividend payouts by state-owned enterprises, according to Goldman Sachs Group Inc. economists including Lisheng Wang. Such measures should be implemented “with caution,” taking into consideration the pace of China’s recovery and confidence rebuilding, they wrote in a June 27 note.
Private Economy
The role of private firms may also be in the spotlight, after Xi met with representatives from some local and foreign companies at a symposium in the eastern province of Shandong in late May, where he highlighted property, employment and childcare as areas in need of change.
Private sector sentiment was battered profoundly by Xi’s crackdown on property developers and technology firms about three years ago. Beijing has shifted to more pro-business rhetoric since as the government seeks to bolster a post-Covid recovery, yet private investment has been slow to emerge without concrete state action to support it.
Skepticism over how efficiently officials would implement policy promises is another reason why investor expectations for the plenum are low, the JPMorgan analysts said, citing examples of pledges to treat SOEs and private companies equally and to boost domestic demand, as well as the package to address housing excesses.
“A restatement of pro-market or pro-reform policies is welcomed, but the gap between talk and actions has been a source of disappointment,” they wrote in the note.
(Updates with declines in China bond yields in third paragraph)
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