In the days ahead of the Chinese Communist Party’s long-delayed Third Plenum, few observers expect that the reform announcements will be enough to revive confidence in the economy. Instead, most expect more of the same: a focus on Party centralization, national security, technology-led development, and skepticism toward foreign businesses. This is despite the fact that China’s economy continues to struggle with a property downturn, weak consumer and business sentiment, distressed local government finances, and subdued foreign direct investment. Many assume that a turn away from Xi Jinping’s “comprehensive” reform agenda could occur only alongside a diminution in his political centrality. Therefore, major market-oriented reforms are unlikely.
Nonetheless, there are reasons to believe that the Party leadership will exhibit a degree of flexibility at the Third Plenum. Positive rhetoric from authoritative Party outlets and modest stimulus measures unveiled in recent months indicate that next week’s reforms could exceed expectations. The Party’s leading journal, Qiushi, recently reprinted a 2013 quotation of Xi Jinping stating, “Only by focusing on the top priority of development can we deploy comprehensive reforms.”
It will be prudent to wait and see what specific reforms are announced and whether the government follows through on the Party’s directives. As in 2013, any announcements could stall during the implementation phase. Even so, early indications point to the fact that Beijing is seeking to stabilize market confidence to enhance its broader reform agenda.
Long-Brewing Reforms
According to the Party Charter, plenary sessions are to be held annually, with the Third Plenum conventionally held in the fall. Thus, the half-year delay of the Third Plenum sparked widespread intrigue. As Carl Minzer writes, “with only one exception, the Chinese Communist Party has held a plenum meeting of its Central Committee every autumn since the 1990s.”
The Third Plenum historically deals with major economic and Party reforms. The 1978 plenum launched “reform and opening up,” while the 1993 plenum introduced the concept of the “socialist market economy.” The first Third Plenum of Xi’s tenure in 2013 introduced a series of market-oriented reforms, many of which subsequently proved elusive.
Potential explanations for the delay of the upcoming plenum are manifold: ongoing corruption crackdowns within the Communist Party elite; indecision about the reforms necessary to inject momentum into the economy; or satisfaction among the leadership regarding China’s steady, official growth rate. Another hypothesis is equally compelling: the leadership wanted to wait to announce new reforms until the bubble in the property market had sufficiently deflated. After four years of austerity measures, the time for gradual loosening may have arrived.
The property market is the key to understanding China’s ongoing economic challenges. Before the COVID-19 pandemic, the property sector accounted for nearly 30 percent of economic activity and 70 percent of household wealth. Most mainstream economists in China and abroad agreed that oversupply, overleverage, and overheating prices were unsustainable, especially in the context of negative demographic trends and restrictions on urban-rural labor mobility.
To restructure the economy away from real estate, Beijing began to clamp down on real estate developers’ access to credit under the “three red lines” policy introduced in 2020. Austerity measures helped stabilize property prices and filter out hundreds of overly indebted developers. Moreover, the clampdown helped divert credit from property to sectors more aligned with the Party’s technology-led development strategy; namely, advanced manufacturing.
Four years later, however, Beijing must reckon with the fact that real estate weakness is undermining the government’s development goals, including technological innovation and manufacturing-led growth. Headwinds in the sector have led to weak private investment, distressed local government finances, a negative wealth effect, subdued consumer sentiment, and higher savings rates. In addition to housing weakness, sentiment has been sluggish due to the increasingly unpredictable regulatory environment, a crackdown on private information technology firms, and geopolitical tensions.
The key problem is that the government cannot simply transfer resources from the property sector to favored technological sectors without creating net negative growth. Research from Rhodium Group shows that many of China’s new loans categorized as “industrial” credit have not gone toward new manufacturing facilities, but rather toward refinancing existing non-performing loans in the property sector. Moreover, since local governments are responsible for the lion’s share of industrial policy spending and implementation, strains on local government revenues — primarily from subdued land sales — could hinder Beijing’s efforts to generate new areas of economic growth.
Many signs point to the fact that Beijing recognizes that housing pressures and prevailing negative sentiment are impacting the Party’s technology-led development agenda. In recent months, not only has Beijing gradually shifted its rhetoric toward the real estate market, capital markets, the private sector, and foreign investment, the government also introduced modest stimulus measures. On this basis, further loosening can be expected at next week’s plenum. While Beijing will continue to avoid a bazooka-style stimulus, it will nonetheless continue to provide reassuring signals to businesses and consumers.
Substance or Symbolism
The Politburo announcement of the Third Plenum on April 30 stated that “reform and opening up is an important magic weapon for the cause of the Party and the people.” Although the phrase “reform and opening” is primarily associated with Deng Xiaoping’s market-oriented reforms unleashed in 1978, the term has taken on new meaning over the last decade under Xi. Reform has broadened from a narrow focus on economic development to encompass “comprehensive” reforms of the economic, political, cultural, social, ecological, and Party systems. Opening up, for its part, not only concerns linking up with the global economy but also unifying economic policies within and between China’s internal, provincial-level markets.
Following the April Politburo meeting, the Party’s flagship journal, Qiushi, published excerpts from Xi’s various speeches on “comprehensively deepening reforms” over the last 12 years. Even in Xi’s recent speeches, including one delivered at the 2024 Two Sessions, Xi sent reassuring signals about “deepening market-oriented reform” and “supporting the development and growth of the private economy.”
In May, Xi met with entrepreneurs and economists in Jinan, providing further signs of a potential course correction. State media reported that Xi asked the attendees to explain “the decline in our number of new unicorn companies,” indicating a sensitivity to the weak business environment. The attendance at the Jinan meeting of Zhou Qiren, a neoclassical microeconomist from Peking University, and Zhang Bin, a neo-Keynesian at the Chinese Academy of Social Sciences, signaled potential openness within the leadership to unorthodox sources of advice. Previously, during his visits to Jiangxi Province in October and Shanghai in late November, Xi reiterated the critical role of the private sector.
More recently, Xi sent positive signals regarding international market openness. At the 5th Central Comprehensively Deepening Reforms Commission (CCDR) on June 12, Xi pointed out that China must “open up in the technology sector, build a globally oriented innovation system, and actively participate in global innovation.” Such language echoes Xi’s remarks during a meeting with American executives and industry leaders on March 27, when the leader said China will “continue to build a market-oriented, legal and international first-class business environment, and provide broader opportunities for companies from all over the world.”
The State Council, for its part, recently released a report on “promoting the development of the private economy,” noting that “the private economy is the main force in promoting China’s modernization.” This follows Xi’s decision last fall to instruct the National Development and Reform Commission to create a new Private Economy Development Bureau. Chinese state media acknowledge that private firms now account for 92 percent of China’s total registered firms.
Taken together, these signals suggest that the Party leadership recognizes that an open international business environment, investor confidence, and a healthy private sector are integral aspects of China’s long-term development goals.
Targeted Stimulus
Rhetorical easing has been matched by moderately stimulatory monetary, fiscal, and regulatory policy. With respect to monetary policy, over the last two and a half years, the People’s Bank of China (PBOC) lowered the prime loan interest rate four times, from 3.85 percent to 3.45 percent, and reduced reserve ratio requirements seven times, from 12.5 percent to 10 percent. Recently, however, the PBOC has refrained from further rate cuts due to weakness in the foreign exchange market.
With respect to fiscal policy, the State Council announced a moderately stimulatory budget deficit of 3 percent in 2024 and introduced a 1 trillion yuan long bond package to finance “major national strategies” like technology innovation and food and energy security. The State Council also passed an appliance trade-in consumer subsidy, which is projected to boost retail spending by 0.5 percent this year.
At the real estate work conference on May 17, the State Council announced a housing market “rescue package,” lowering payment requirements, reducing national mortgage rates, and introducing a new 300 billion yuan bond for local governments to buy up unsold housing stocks.
Beijing has also made efforts to prop up equity markets. On April 12, the State Council issued guidelines for promoting the development of China’s capital markets, the first such guidelines released in two decades. The move kicked off a 17 percent rise in the MSCI China index in one month. Among the State Council’s guideline’s “9 Key Points” were recommendations that banks and trusts allocate more capital to publicly listed equities and that listed companies make higher dividend payouts.
So far, Beijing’s accommodating fiscal, monetary, and regulatory measures have not been enough to restore business and consumer confidence. Home prices continued to decline in May after the State Council’s rescue package began to take effect. In addition, China’s top three domestic stock indices, the HSI, CSI 300, and SSE, remain under pressure. Consumers continue to save or pay down debt rather than make discretionary purchases. Without further rhetoric and policy support to revive expectations, investors and consumers will continue to refrain from making the long-term investments necessary to propel China’s real economy forward.
Beijing still has ample dry powder to deploy if existing measures do not revive confidence. The May stimulus measures were estimated to amount to less than 1 percent of China’s GDP, lower than the 3 percent of GDP fiscal support unveiled during the 2015-2017 housing downturn. In an emergency, Beijing could tap its massive foreign exchange reserves or low central government debt to inject further stimulus.
Past is Prologue?
During previous gatherings of the Chinese Communist Party, outside observers were correct to temper expectations regarding the prospect of fundamental course corrections. Following Xi’s first Third Plenum as paramount leader in 2013, Dan Rosen of Rhodium Group wrote that “the Party issued a bold call for economic reform.” Shortly thereafter, it became clear that the 60 “decisions” announced were not worth the paper they were written on. Nearly a decade on, Rosen described Xi as a “failed reformer.”
Likewise, in the lead-up to the 20th Party Congress in 2022, many observers hoped that Xi would lift COVID-19 lockdowns and appoint reform-minded officials to the Party leadership. Instead, “all of Xi’s men” ascended to the Politburo Standing Committee and the Party elite waited to lift pandemic lockdowns until a wave of protests swept through the country in late 2022. Time and again, under Xi’s rule, continuity rather than change has been the norm at pivotal Party gatherings.
Speculation that this time could be different rests on recent signals emanating from authoritative Party documents as well as modest stimulus measures in the lead-up to the Third Plenum. Of course, the goals of Party centrality, national security, and technological self-sufficiency will remain the bottom lines of Xi’s governance. Without efforts to revive market confidence, however, Beijing’s broader reform agenda could falter.
