China’s third plenum: the 5 burning questions heating up debate – and our take

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China has – after some delay – scheduled the much-anticipated third plenum of its Communist Party’s Central Committee for Monday, with the four-day meeting expected to shape the country’s economic strategy for the next five to 10 years.
Previous third plenums unveiled landmark changes. At the plenum of 1978, the policy of reform and opening up was adopted. In 1993, China’s status as a “socialist market economy” was formalised, and the 2013 plenum codified the market’s “decisive role” in resource allocation.

Below are five questions being asked by many in advance of the third plenum – and our thoughts on the answers.

1. Will China announce a massive stimulus?

The facts: At the World Economic Forum’s Annual Meeting of the New Champions – or “Summer Davos” – in late June, Premier Li Qiang said in the aftermath of Covid-19 that China’s economy, like a patient coming out of illness, needs to gradually recover and return to normalcy.

Our take: An announcement of an imminent stimulus is most unlikely, in our view.

Historically, the third plenum has resulted in comprehensive reforms that lay out China’s economic road map for decades to come, rather than address near-term issues.

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China’s third plenum: what to expect from the much-delayed policy meeting

China’s third plenum: what to expect from the much-delayed policy meeting

Chinese officials have also said many times they have no intention to “flood the economy” with a stimulus.

And an enormous stimulus does not fit into President Xi Jinping’s governance philosophy, where more weight and resources have been dedicated to areas deemed critical to enhance the nation’s core strengths – which has not included finance.

2. Will China make more changes to personnel?

The facts: Two former defence ministers, Li Shangfu and Wei Fenghe, have been expelled from the Communist Party – fuelling speculation more removals are to come.

Our take: Personnel changes are unlikely to be addressed with any lengthy elaborations, as the economy has traditionally topped the agenda at third plenums.

However, as this is a meeting of the Central Committee, it will be worth watching to see if former foreign minister Qin Gang will lose his standing as a member after being sacked from his posts at the ministry and State Council – and find out which alternates will replace those members who have been removed.

3. Will China lay new foundations for housing or land?

The facts: On May 17, China unveiled a suite of policies to stabilise the property sector on both the supply and demand sides, lowering mortgage rates and announcing a 300 billion yuan (US$41.3 billion) relending programme backed by the central bank.

Meanwhile, at a meeting of the Central Commission for Comprehensively Deepening Reform on February 19 – chaired by Xi – a document was approved on the reform of the country’s system of land management.

Our take: There is no doubt housing will be mentioned at the meeting, given its importance to the country’s economy.

However, contrary to some expectations for the sector’s turnaround via a stronger rescue package, we believe the government is more likely to carry out structural reforms to stabilise and eventually reduce the weight of housing in the overall economy. From the government’s perspective, the industry’s value proposition has changed – from an economic engine to a risk in need of defusing.

We believe the government will determine which industries can serve as new economic growth drivers to fill the void left by the property sector.

In terms of rural land policy – highly correlated with total factor productivity and labour mobility – we believe some policy changes are probable. The question is the magnitude of those changes.

The style of rural land reform undertaken in the central municipality of Chongqing – where use rights for collectively owned agricultural land were allowed to be sold to developers or investors – is a challenging one to roll out nationwide, in our view, as the security of low-income farmers is a major consideration for policymakers.

4. Will China roll out more ‘tech support’?

The facts: Beijing has placed innovation on a high pedestal, with “new quality productive forces” appearing more in official rhetoric – a phrase referring to the long-term growth potential of tech and other emerging industries.

Our take: Definitely. We expect the party will talk at length on how to advance China’s science and technology, especially in areas of strategic importance.

Closing the technological gap with developed countries and moving up the value chain would lay a solid foundation for China to remain competitive for decades to come. The depth and breadth of the country’s commitments in this area are essential subjects, in our view.

5. Will China keep up its sales pitch for private and foreign businesses?

The facts: Xi held a high-profile meeting with business leaders and economists in May, and Premier Li Qiang and Vice-Premier He Lifeng made respective appeals to foreign investment in late June and early July.

Our take: Yes. Reform and opening up has traditionally been the theme of the third plenum and we think this edition will be no exception.

Building a better relationship with foreign investors and boosting private sector confidence are more important than ever to revitalise the economy, especially considering heightened geopolitical tensions with the US and the broader West – and their downstream effects on trade.

The million-dollar question is how convincing China’s entreaties will be.

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