Investors have had a bumpy ride in China recently, and Chinese leader Xi Jinping’s policies have made things only worse. Some are looking to an upcoming meeting of the Chinese Communist Party leadership to set things straight, but they’ll almost certainly be disappointed.
The CCP Central Committee, consisting of some 370 senior officials, will meet Monday through Thursday for their third plenary session since taking office in 2022.
Since 1978, third plenum meetings have been associated with economic reforms. That year, Chinese leader Deng Xiaoping used the third plenum to advance his “reform and opening” agenda, which helped turn what was then an economic basket case into the powerhouse China is today.
Although most subsequent third plenums have been less game-changing, these meetings usually focus on long-term economic priorities, making them the natural setting to present any major course correction. That’s unlikely to happen.
The upcoming plenum may be consequential, but not for the reasons some hope. Rather than announcing major policy adjustments aimed at reinvigorating the private sector and spurring a new era of economic growth, this meeting probably will serve to further institutionalize Xi’s longstanding agenda.
This is clear from the official communication about the event. Last month, after finalizing the agenda of the rubber-stamp plenum, China’s ruling Politburo revealed that one key deliverable will be “a resolution on comprehensively deepening reform and advancing Chinese modernization.”
For those unfamiliar with party parlance, “comprehensively deepening reform” is a name that has been given to Xi’s policy agenda for over a decade. It was also the theme of his first third plenum in 2013.
That plenum resulted in formation of what was called the Central Leading Group for Comprehensively Deepening Reform. This itself was a power grab, as it gave Xi policymaking powers that previously belonged to China’s premier. (In 2018, the body was strengthened and renamed the Central Commission for Comprehensively Deepening Reform.)
To most observers, Xi’s approach to governance is the antithesis of reform. Indeed, while he has advanced liberalization in some economic sectors, most of the changes he’s implemented over the past decade are far from the liberal reforms desired by private businesses.
But that’s not the metric by which the Chinese Communist Party gauges its success. Xi’s “reforms” arguably have made the party more powerful than ever, and the CCP views its growing influence over business as a good thing.
Not only does the party see powerful corporations as threats to its monopoly on power. Decades of lax regulatory enforcement while the Chinese government focused entirely on rapid economic growth enabled risks and imbalances to fester. Left unresolved, they could spark a crisis and threaten China’s leadership.
Since coming to power, Xi has sought to restructure the economic model away from a focus on quantitative growth toward what he calls “high-quality growth” that is slower but more aligned with Beijing’s strategic interests and, in the CCP’s view, more sustainable in the long term. This growth model is characterized by a focus on technological innovation, high-end manufacturing, supply chain security, and evening out the wealth gap, among other long-term efforts.
This isn’t just Xi’s agenda. The leadership of the Chinese Communist Party recognized the risks inherent in their growth model long before Xi took the helm. But Xi’s consolidation of power and ruthlessness have uniquely enabled him to break through vested interests and institutional roadblocks to change the economy’s trajectory.
Many of these efforts hurt businesses and depress growth in the near term, but the party leadership is willing to pay that price in hopes that it will help China escape the middle income trap and prevent even bigger problems in the future.
This is where the upcoming plenum comes in. Based on what has been reported so far, a major focus will be China’s efforts to achieve technological self-sufficiency and transition into a world-leading technology power by 2035. This is an especially urgent task for the Chinese Communist Party amid tightening measures by the U.S. and other key suppliers that aim to deny Beijing access to sensitive technologies it deems essential for its economic interests and military modernization.
The plenum likely will result in significant measures to promote China’s technology goals. However, like other outcomes, these measures will be light on specifics. What they mean in practice will become apparent only as they are implemented over the next several months.
The plenum likely will also address risks related to China’s struggling real estate sector and heavily indebted local governments. Fiscal and tax reforms may be presented to address these problems. Among other possible developments are rural land reform, further loosening of China’s household registration system, and better integration of the country’s disparate regions into a unified market by breaking through local protectionism.
These are all deep-rooted problems for which the Chinese Communist Party lacks easy solutions. If decisions announced at the plenum manage to fix some of these issues, that will be significant.
But they’re not the reforms that businesses want and need.
Of course, the CCP can’t afford to ignore the private sector’s plight. The party likely will announce a slew of measures aimed at improving the business environment and attracting foreign investment, which hit a 30-year low last year.
The party is concerned about China’s acute economic challenges and fears that if conditions become too dire, civil unrest could result. China also needs moderately high growth to continue in order to reach its goal of becoming a “moderately developed economy” by 2035.
But the Chinese Communist Party doesn’t believe a crisis is imminent. Maintaining growth and placating investors are secondary to fixing longer-term structural challenges that could eventually result in an even more serious crisis for the CCP.
Thus, attempts to sweeten the deal for China’s private businesses likely will be limited and take a back seat to the “tough love” treatment the party has dealt out in recent years.
Investors can hope for change, and they may even receive some pleasant surprises at the plenum. But the CCP believes it’s on the right path. And that makes a fundamental course correction highly unlikely.
