Third plenum of the 20th CCCPC: Our interpretation

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Xinhua News Agency issued the "Communique of the Third Plenary Session of the 20th Central Committee of the Communist Party of China (CCCPC)". The third plenary session of the 20th Central Committee of the Communist Party of China was held in Beijing from July 15 to 18, 2024. The meeting reviewed and approved "Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization".

The third plenary session anchored the goal of basically realizing socialist modernization by 2035, and focused on deploying major reform measures in the next five years in the areas of economy, politics, culture, society, ecological civilization, national security, national defense, the military and etc. In this report, we highlight below 7 points directly relating to economic developments.

 

#1, The third plenary session highlighted the importance of a high level socialist market economic system. The communique proposed that “a high-level socialist market economic system is an important guarantee for Chinese-style modernization”, “must give better play to the role of the market mechanism, create a fairer and more dynamic market environment, optimize the efficiency of resource allocation and maximize benefits”. It also said to ensure equal access to factors or production and a fair competition for enterprises with different ownerships, to allow a common development of all types of ownership economies. It also stated to build a unified national market and improve the basic system of market economy. 

Comments: state-owned enterprises and state-owned capital will be further developed and strengthened, and be prioritized from a strategic functional value. At the same time, promoting fair play would allow a better development of the private sectors, which help release the latent power of the economy and stimulate innovation. A unified national market, in the era of anti-globalizaiton, would help smooth internal circulaton and allow China better leverage its economy of scale.

#2, High-quality development is the primary task in building China into a modern socialist country in all aspects. New quality productivity in line with local conditions will be fostered. It said that it is essential that China must use the new development philosophy to steer reform and ground the efforts in the new stage of the a development. China must deepen supply-side structural reform, and create new growth drivers and strengths.

Comments: Developing new quality productivity is an inherent requirement and important focus for promoting high-quality development. New quality productivity is a form of productivity that is supported by new technologies, characterized by the deepening of high-tech applications, and has broad penetration and integration. Agaisnt the background of increasing uncertainty in external demand and worsening demographic profile, the importance of productivity to China’s growth is becoming more obvious. To realize it, we see deepening reforms in education, technology system, and talent development system.

#3, Deepen the reform of the financial system to ensure high quality economic development.

Comments: Financial system is essential for an economy, over years, China’s financial intermediation has been contributing a growing share to China’s GDP, reaching 8.8% of total GDP as of Q2 2024, up from 2004’s 4.1%. However, compared with the goals and requirements of Chinese-style modernization for the sector, the quality and efficiency of financial services to the real economy are not high, and there exists phenomenons of "idle funds" and "related arbitrage" and various risks, including real estate risks, local government debt risks and risks faced by some middle and small financial companies (mentioned by the communique). These require China to deepen the reform of the financial system. We expect that the next steps of reforms would involve building a modern central banking system and further deepening interest rate and exchange rate reforms, building an effective financial regulatory system,   improving the multi-layer financial market system and promoting a better composition of direct and indirect financing, and pushing for capital market reforms as well.

#4, Deepen reforms of fiscal and taxation systems. It was stated also that China must pursue coordinated reforms in fiscal, tax, financial and other major sectors and work to enhance the consistency of macro policy orientation.

Comments: Current fiscal system has some drawbacks, such as financial power more and more moving to central government and administrative power more and more decending to local governments, a declining share of local fiscal revenue due to an underferforming real estate sector and others, and large expenditure pressure faced by some local governments. China’s tax burden structure needs to be optimized as enterprises bear a relatively heavy tax burden.  Proper reforms fiscal and taxation could improving local government’s financial power, increase local government’s capacity in taking initiative in stabilizing the economy, and reducing local debt risk as well. Enhancing the consistency of fiscal and monetary policy orientation suggests a potential step-up in fiscal support to the economy.

#5, The integrated development of urban and rural areas. China must coordinate new industrialization, new urbanization and comprehensive rural revitalization, narrow the gap between urban and rural areas, and promote the common prosperity and development of urban and rural areas. It is necessary to deepen the reform of the land system.

Comments: 2023 data showed that consumption expenditure per capital in rural was only about 55% of urban’s, and China’s urbanization rate of registered population (people with Huko) was about 48.3%, despite a overall 66.16% urbanization rate for a normal definition. Promote equal exchange and two-way flow of urban and rural factors, and narrow the urban-rural gap would essentially imply a converge of urban and rural consumption, implying a huge room of improvement for living conditions of rural households and people living in cities without a Huko (which represents a privilege for urban free education and other social welfare). The development of new urbanization is essentially a process of urbanization of migrated citizen from rural areas.

#6, Improve the high-level systems and mechanism for opening up. It is stated that China must remain committed to the basic state policy of opening to the outside world and continue to promote reform through opening up. Leveraging the strengths of China's enormous market, China will enhance its capacity for opening up while expanding cooperation with other countries and develop new institutions for a higher-standard open economy. We will steadily expand institutional opening up, deepen the foreign trade structural reform, further reform the management systems for inward and outward investment, improve planning for regional opening up, and refine the mechanisms for high-quality cooperation under the Belt and Road Initiative.

Comments: The statement shows that the emphasis of China’s opening up has been transitioning from opening up goods and factors of production towards rules and institutional systems, and with the development of technology, it is likely that China’s services trade see great potential ahead.

# 7: It stated that ensuring and improving people's wellbeing is a major task. It stated that China must refine the system for guaranteeing basic public services, work to provide inclusive public services, meet essential needs, and provide a cushion for those most in need, and focus on resolving the most practical problems that are of the greatest and most direct concern to the people, so as to meet people's aspirations for a better life. It stated that China will improve the income distribution system, the employment-first policy, and the social security system, further reform the medical and healthcare systems, and improve the systems for facilitating population development and providing related services.