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China’s Third Plenum: Socialism Does Not Require Stimulus 



The Communist Party of China (CPC)’s 20th Third Plenary Meeting will be held from July 15 to 18. As a Marxist Party that upholds ‘democratic centrism’, CPC decisions are usually made top-down, with plenary sessions serving as the arena to announce major directives. Notably, the Third Plenum is usually designated for introducing the CPC’s latest political economic reforms. 


With the PRC’s CPI dropping since February, many observers yearn for strong fiscal measures to boost the economy. The Plenum, nonetheless, seems to be more focused on structural restructuring. 


Reform, but for what? 


Pre-plenary announcements notified that the session will focus on deepening reform measures and Chinese-style modernisation. In the 1980s, the CPC pushed forward reform and opening-up under leader Deng Xiaoping, which promised economic liberalisation. Post-2012 reform agendas, however, focused on strengthening governance capabilities, returning to a trajectory of re-centralisation. 


New policies, nonetheless, should not be viewed as a complete retreat from previous relaxation policies. In fact, in 2018, Xi called for further opening-up, especially in free trade zones such as Guangdong, Tianjin and Fujian. Unified administrative structures also help with financial and economic regulation, which was in a disorderly condition before 2012. 


To see where the Party is rearing towards, it is imperative to understand its definitive goal, Chinese modernisation. Modernisation, first and foremost, is a political task, according to Beijing’s financial authorities. If the CPC can continue helping China boost its economy and improve citizen’s well-being, it can remain firmly entrenched in the PRC polity as the state’s leading party. 


Obstacles to Overcome


To guide the PRC out of middle-income traps, domestic pundits deem industrial upgrades imminent. Liu Qiao, PKU Guanghua School of Management head, stresses the need to foster strategic emerging industries with future potential, pushing the economy forward via technological advancements. The need for tech innovation is further aggravated by the US’ reluctance to share high-end technology. 


However, the PRC cannot simply encourage entrepreneurs to maximise profits due to concerns about aggravating social inequality. In 2021, a Gini coefficient (index measuring income disparity) of 0.4 is recorded in the PRC, which is higher than in most ‘Western’ countries, including the US. The inability to raise the living standards of citizens hampers effective demand, curtailing growth potential. Furthermore, inequality and unmet expectations may result in social, fiscal or even political risks, delegitimising the Party’s ‘people-centric’ mantra


Many imminent issues, therefore, need to be addressed. The CPC has to boost economic performances, back sci-tech growth, enhance demand while advancing social equality all at once. 


Incoming measures 


Without a doubt, the Party favours extending state control to guide innovation and investment decisions. With the goal fixated on cultivating ‘new productive forces’, i.e. cutting-edge sci-tech innovation, the Party seeks to employ a nationwide mobilisation system to centre resources on technological breakthroughs. 


In the words of State Information Centre Economist Yu Fengxia, the state will back research input, build R&D networks that extend across state, academic and private sectors. It will also lend a hand in strengthening industrial supply chains. Notably, the National Development and Reform Commission (NDRC) hopes to draw on insurance funds and bank assets to support innovation, encouraging investors to be ‘patient’ for returns. ‘Patient capital’ relies on bank savings and long-term investments, which seems to go against fiscal stimulation. 


Meanwhile, the state is likely to implement measures for building a united national market. During the reform and opening-up era, the state relaxed control over localities, allowing them to compete and devise distinct sets of regulations to foster growth. Regulatory fragmentation, however, hampered nationwide resource coordination and income redistribution. Arbitrary rules also made investing in China risky, which is not beneficial for further attracting foreign capital. A reassertion of central authority helps to merge sometimes contradicting local regulations, advancing regional collaboration.  


Possibly, the Party will also tighten regulation on the housing market and mid- to small-scale financial institutions. Along with such measure will be a stiffening of local debt management to prevent financial collapses. 


Risks and Prospects 


The general direction for this round of reform is supply-side oriented, i.e. focusing on boosting and upgrading the PRC’s industrial capacity. The primary goal is to enhance productivity, earn more and then redistribute resources into areas of social necessity. While that may be beneficial in the long run, the PRC is currently facing a serious deficiency of effective demand. 


As noted by Chinese Academy of Social Sciences (CASS) Academician Li Yang, economic activities in all sectors have slowed down, with both a drop in household dispensable income and an unwillingness for corporations to borrow. Most enterprises are turning current deposits into fixed deposits, with money returning to banks. The situation is even more pressing as the PRC has a long way to go in removing provincial protectionism and leading high-end tech innovation. 


While supply-side reforms are undoubtedly vital to long-term development, there is a need to pay further attention to demand-side incentives. CASS Academic Committee member Yu Yongding recommends boosting state expenditure, expanding infrastructure investments while issuing national debt. Despite previous turbulences in local debt conditions, the PRC’s overall national debt to GDP level is relatively low. Banks’ balance sheets are also quite healthy, which meant that domestic enterprises could have a leeway to borrow. 


Fiscal stimulation may help boost domestic consumption, resulting in net gain instead of financial turbulence. Whether recommended prescriptions will be adopted, however, remains to be seen in mid-July.



Image: Dong Fang

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