China’s Third Plenum signals reforms, but tensions remain: analysts

Beijing steps up stimulus measures and reforms, as small firms suffer from a liquidity trap, and some foreign private equity firms leave China.

August 28, 2024

The recently concluded Third Plenum in Beijing announced a range of reforms with the hope of attracting foreign investment in China. However, some analysts are sceptical over what they see as a contradiction between the announced reforms and stronger state control announced at the plenum.

The Third Plenum was held in Beijing from July 15 to 18, when a communique was released. The meeting is convened by the Central Committee of the Chinese Communist Party (CCP) roughly every five years to map out the general direction of social and economic policy. 

A delegation of executives of heavyweight US firms from Boeing, Goldman Sachs and Starbucks visited China around July 24.

Commenting on this visit, Mao Ning, a spokeswoman of China’s Foreign Ministry, said at the ministry’s press conference on July 24, “There has been a lot of global attention on the new blueprint for China’s reform and opening up adopted at the third plenary session… The session sent a strong message to the world about China’s steadfast commitment to reform and opening up in the new era.”

“The Resolution adopted at the plenary session put forward over 300 important reform measures, and made systemic plans on further deepening reform comprehensively and advancing Chinese modernisation. We believe that their implementation will … create more opportunities for China and the rest of the world,” she added.

Contradictions?

However, outside of China, the views of the Third Plenum were less positive. 

An article of the London-based International Institute for Strategic Studies (IISS) on July 23 said, “In China, contradictions between party vision (and policy) and market realities are common, and continued party control may undermine the policy goals announced in the plenum communiqué."

It continued: "This is particularly the case with regards to the plans to boost foreign investment. The communiqué announces reforms to open more of China’s economy to foreign investment whilst simultaneously describing plans to establish greater party-state control over the market.”

This year there have already been some concrete steps to boost arrivals from foreigners with a relaxation of many visas for short trips (for example Australians can now enter for 15 days), which could help bring back some investment. However, more reforms will be required for reassurance around long-term investments. 

Meia Nouwens, a senior fellow of IISS, wrote in the IISS article: ". . . although China welcomes ‘all forms of ownership’, both public and private businesses must ensure they act equally ‘in accordance with the law’ and in line with party interests. This tension between the CCP’s desire for market control and coordination and the need for foreign investment is unlikely to reassure foreign investors." 

“The Plenum’s analysis and policy proposals on the economy are likely to draw a more skeptical reaction from a variety of corners, domestic and international, because of its deeply statist focus,” said Scott Kennedy, a senior adviser of CSIS, in the CSIS feedback.

Economic challenges

The Third Plenum is seeking to address challenges in China’s economy, which extends beyond the property downturn. 

“Many private equity firms are leaving mainland China. Most of them are owned by overseas mainland Chinese who are investing back in China,” Alicia Garcia-Herrero, Asia Pacific chief economist of Natixis, a French bank, told FinanceAsia.

“It’s hard for them to get returns or sell their investments,” Garcia-Herrero explained.

“There is a liquidity trap in China. Banks are not lending. The money is trapped in saving deposits. There is a large risk aversion. China’s M1 money supply is plummeting. So it’s very hard for small companies to borrow money,” Garcia-Herrero said.

China’s M1, which covers cash in circulation plus demand deposits, was Rmb66 trillion ($9.26 trillion) at the end of June, down 5% year-on-year, the Chinese government announced earlier in July.

For the second time in a week, the People’s Bank of China conducted an unscheduled lending operation on July 25 at steeply lower rates, suggesting the Chinese authorities are trying to provide more stimulus to the Chinese economy, reported Reuters.

“They had to wait till the Third Plenum before they started cutting interest rates. I hope the Chinese authorities speed up their reactions,” Garcia-Herrero commented.

Where to invest in China

After the communique of the Third Plenum was released, Garcia Herrero recommended investments in digitalisation of industries like artificial intelligence and robotics, which is being promoted by the Chinese government, said Garcia-Herrero. “The Third Plenum is pushing green tech, robotics and drones.”

However, there is a risk of overcapacity resulting from lots of people rushing into these sectors, Garcia-Herrero cautioned.

Garcia-Herrero said industries with huge capital expenditure (capex) over a long period, like semiconductors, should be avoided.

“I would choose light capex industries. Small capex allows investors to cash out quickly,” Garcia Herrero recommended.

The communique of the Third Plenum reinforces the desire of the Chinese government to shift the Chinese economy away from real estate and building-led growth towards advanced technologies such as artificial intelligence, semiconductors and green technologies, said Harry Murphy Cruise, an economist at Moody’s Analytics, in a report on July 19.

The reference in the communique of the Third Plenum to support for domestic consumption was a positive development, wrote Cruise. “That said, there is still tension between expanding the supply side of the economy and boosting household spending. The communique mostly focused on ‘new productive forces’, ‘the scientific and technological revolution’, and ‘industrial transformation’. Mention of support to household wellbeing didn’t come until the tail end, and even then, the 4,000-word communique gave the topic just one paragraph.”

The spending power of Chinese consumers could be indirectly spurred by buybacks of property to create affordable housing, Tariq Dennison, a wealth manager of GFM Asset Management, an international wealth management and investment advisory firm, told FA.

“I didn’t really see any major changes or surprises come out of the 2024 Third Plenum, so big picture, my approach to investing in China remains largely unchanged,” said Dennison.

“In China, I’ve mostly focused on consumer product and service companies, including e-commerce and tech, which have the lowest reliance on debt and policy making to grow revenues and make profits. I still plan to largely avoid financials and real estate, as these rely the most on debt and policy decisions,” Dennison disclosed.

“I’ve largely avoided bonds related to China, both in renminbi and US dollars, as I see these as being as risky as Chinese equities with only a fraction of the upside,” he added.

“But why did Xi not seize the opportunity to make bolder changes? Why did he ignore domestic and foreign calls for a course correction given anemic confidence, inadequate consumption, and rising trade frictions?” asked a report of the Asia Society Policy Institute by Neil Thomas on July 25.

In May the plenum drafting team circulated a draft decision to cadres, retired leaders, satellite parties, and policy experts, and they received 1,911 suggestions and made 221 revisions, said the Asia Society Policy Institute paper. In comparison, the drafting team for the 2013 decision received 2,564 suggestions and made 539 revisions, meaning this plenum saw a 25% fall in suggestions and a near-halving of their acceptance rate from 21% to 12%, the paper added.

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