China/Hong Kong Market Pulse: The Words Resemble the 2013 Blueprint, The Deeds Will Determine the Outcomes

Key points:

• Resembling the 2013 Reform Blueprint
• Reiterating the Market's Decisive Role in Resource Allocation
• Providing Additional Space for the Private Sector
• Focus on Advanced Manufacturing and Industrial Technology
• Emphasis on Opening Up, No Mention of Dual Circulation
• A 2029 Target to Add a Sense of Urgency

The Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC), held from July 15 to 18, 2024, concluded with the adoption of the "Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization" (the “Resolution”). This Resolution outlines China's strategic blueprints for the coming years. While some investors are disappointed by the lack of plans for additional economic stimulus measures, the notable tendency to return to the reform principles established during the Third Plenary Session of the 18th Central Committee in 2013 is an encouraging development. However, the true test of these policies will be in their implementation. The upcoming Politburo meeting at the end of July, which typically sets out more details on the implementation of the Resolution from the Third Plenary Session, may provide investors with further insights.

Third Plenums: Landmark Events in Economic Reform

The Third Plenary Session, often referred to simply as the "Third Plenum," is a significant meeting in the political calendar of the CPC every semi-decade. The Third Plenum of the 11th Central Committee in 1978 is usually regarded as the landmark event that initiated the reform and opening up of the Chinese economy. The 2013 Third Plenum of the 18th Central Committee was another key milestone in China’s economic reform history, known for a 60-point resolution (the “2013 Resolution”) that set out plans for substantial advancements in marketization, privatization, and opening up of the Chinese economy. The most well-known of these is its pledge to “let the market play the decisive role in allocating resources,” a step forward from the previous taxonomy of “basic role.” As many of these reform initiatives petered out over the years and policies implemented seemingly drifted in a different direction in some areas, investors have been watching closely to see if the Chinese leadership will return to the 2013 playbook and reset the direction of the economic development strategies towards more marketization, privatization, and opening up, which have been the driving engines of rapid economic development in China since 1978.

Reiterating the Decisive Role of the Market in Resource Allocation

One of the key aspects of the Resolution is its reiteration of the role of the market in the Chinese economy. The Resolution calls for seeing that “the market plays the decisive role in resource allocation,” a phrase that closely aligns with the language used in the 2013 Resolution. While it emphasizes “ensuring effective regulation” and addressing “market failures,” reaffirming the market's decisive role nonetheless signals a commitment to continuing the market-oriented reforms. It has taken China 20 years to move from letting the market play a “basic role” in 1992 to allowing the market to play a “decisive role” in 2013 in the country’s effort to switch from a Soviet-style central planning system to something closer to a market economy. The underlying structures and contents of the Resolution substantially resemble the 2013 Resolution. It is a deliberate effort to shape the narrative to shore up the population’s, not just investors’, confidence in the leadership’s intention of continuing the economic reform started in 1978 and the unfinished initiatives to deepen pro-market reforms in 2013.

Rhetoric about Private Enterprises Pending Actions

The Resolution emphasizes the protection of economic rights for all types of ownership, both public and private, adhering to the law. Adding the term "long-term" to this protection is a positive signal for private enterprises and investors, suggesting a commitment to stable and predictable policies regarding property rights. Moreover, the Resolution commits to formulating a private sector promotion law, aiming to remove barriers to market access, including work in infrastructure, fostering a favorable environment, and more opportunities for the private sector. Furthermore, the Resolution states that it will “support capable private enterprises in leading national initiatives to make breakthroughs in major technologies” and that the Chinese government will “provide private enterprises with greater access to major national scientific research infrastructure” and to “affordable financing.”

The Marxian warning of “disorderly expansion of capital” is not seen in the Resolution, instead highlighting the importance of “developing better mechanisms to ensure the contributions of factors of production, such as labor, capital, knowledge, technology, management, and data, are determined by the market and rewarded accordingly.” Whether this rhetoric can comfort entrepreneurs and investors remains to be seen. Nonetheless, it is a moderate positive as it signals that private capital is at least facing a green light for the time being and the red light will not be turned on anytime soon.

Steering Capital towards the Country’s Strategic Objectives

The private sector, including both entrepreneurs and private capital, remains subject to guidance and control by the authorities. They are given the green light as the authorities recognize the private sector’s general tendency to excel in vitality and innovation compared to their public sector counterparts. The Resolution calls for the steering of state-owned capital towards industries critical to national security, public services, emergencies, and forward-looking strategic emerging industries. At the same time, it supports private enterprises in "leading national initiatives to make breakthroughs in major technologies."

It is important to note that in China, state-owned enterprises have monopolistic control over the upstream of almost all key industries. If implemented as stated, the provisions of the Resolution may narrow the scope of industries dominated by state-owned capital and provide some meaningful space for private capital to invest and operate on competitive grounds.

Advanced Manufacturing is a Focus

The Resolution calls for the expansion of advanced manufacturing and the transformation of industrial organization, institutional arrangements, and operational models to enhance the manufacturing sector. It also pledges to promote "the development of the digital economy and refine the policy system for developing the digital industry and transforming traditional industries with digital technologies." The digitalization of the economy will emphasize manufacturing rather than consumer-facing industries.

Missing Dual Circulation, Opening up the Labor Market

The term “dual circulation” is completely missing in the Resolution and the term “self-reliance” appeared only once. On the other hand, the term “opening up” appeared 35 times in the Resolution, apparently doubling down efforts to charm foreign investors amid the challenging geo-economic environment globally and China’s own tainted external reputation in recent years.

Meanwhile, the Resolution has expanded the scope of opening up the economy, as it pledges to orderly open up not only the goods, services, and capital markets but also for the first time mentions the opening up of the labor market to a certain extent. If this is implemented, it implies that it will be easier for foreign workers to come to work in China, increasing the labor supply in China. This is politically difficult to implement, especially when domestic unemployment rates are high among young people. In the long term, it expands the range of options available amid a decline in the working-age population and is positive for economic growth.

A 2029 Target to Add a Sense of Urgency

The Resolution this time contains a target of 2029 for completing the reform tasks outlined in it. It is likely that the leadership wants to impose a sense of urgency to mobilize the ranks and files to execute the instructions and plans from the top, especially in areas that affect vested interests in ministerial, provincial, and local governments as well as state-owned enterprises. Using the year 2029—marking the 80th anniversary of the founding of the People's Republic of China—can make it easier in the narrative. Moreover, by setting this deadline, General Secretary Xi Jinping may also signal his confidence in remaining in power and maintaining stability through his fourth five-year term from 2027 to 2032. The 2029 target will be a milestone in Xi’s long-term vision of building China into a “high-standard socialist market economy” and “basically realizing socialist modernization” by 2035, and becoming a “great modern socialist country” by 2049, the centenary of the People's Republic.

Implications

Despite lacking details and major breakthroughs, the 2024 Third Plenum resolution represents a significant policy statement that appears to return to and build upon the reform agenda set out in the 2013 Third Plenum. This continuity is encouraging, especially given the relatively low expectations preceding the meeting.

The Resolution opens up new opportunities for private sector involvement in infrastructure projects through price reforms in water, energy, and transportation. It also signals increased support for private enterprises in technological innovation, potentially creating new avenues for private enterprises to participate in the growth and development of high-tech sectors.

The emphasis on opening up goods, services, capital, and labor markets is also encouraging, particularly the notable mention of opening up the labor market. This expanded focus on opening up is intended both to mitigate the negative impact of heightening geopolitical and geo-economic frictions and to induce pressures on domestic stakeholders to implement the reform.

For investors with a long-term perspective, the Resolution offers reasons for cautious optimism. Companies in industries such as industrial technology, the Internet of Things, and telecommunications may be particularly worth watching, as they align with the Resolution's focus on innovation and technological development, particularly in manufacturing.

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