China/Hong Kong Market Pulse: Evaluating the Potential Rebirth of Pro-Market Reforms

Key Points:

• Golden Week saw substantial domestic tourist growth but fell short of government forecasts.
• All eyes are on the upcoming Third Plenary Session of the 20th CCCPC.
• The Decision of the Central Committee in 2013 outlined pro-market reforms.
• The session could herald a return to these reforms, offering a unique solution to China's economic challenges.
• The economic implications of this potential shift are profound, impacting China's growth and stability.

Introduction

China Amidst the recent National Day Golden Week holiday in China, notable increases in domestic tourism activity were observed, although they marginally missed government predictions. However, the spotlight now shifts to a far more consequential event - the impending Third Plenary Session of the 20th Central Committee of the Communist Party of China, expected to convene in late October or early November. This session could potentially redefine the trajectory of China's economic strategy, with the possibility of revisiting pro-market reforms articulated in the 2013 Decision of the Central Committee. These reforms, which emphasize the decisive role of the market in resource allocation, hold the promise of offering unique solutions to China's current economic challenges. The implications of such a shift are profound, extending beyond mere economic considerations to impact China's overall growth, stability, and global influence.  

Last Week: National Day Golden Week Tourist Traffic and Spending Undershot Expectations

According to estimates from China's Ministry of Culture and Tourism (the “MCT”), during the 8-day Golden Week holiday, the number of domestic trips increased by 71.3% Y/Y to 826 million, which is 4.1% higher than the Golden Week in 2019. However, this fell 7.8% below the MCT’s forecast of 898 million, which was made at the onset of the holidays.

Domestic tourism revenues grew by 129.5% Y/Y to RMB 753.4 billion but only experienced a modest increase of 1.5% compared to the levels in 2019 before the pandemic. This figure was also 3.7% below the MCT’s projection of RMB 782.5 billion ahead of the Golden Week. The spending per head recovered to 98% of the level seen during the Golden Week in 2019.

Cross-border entries and exits, as reported by China’s National Immigration Administration (“NIA”), nearly tripled from last year, reaching a daily average of 1.48 million but only achieved 85.1% of the level recorded in 2019. Additionally, it was 6.5% below the NIA’s estimate of 1.58 million made before the holidays.

Overall, tourist traffic and spending both showed signs of recovery during the Golden Week, but these figures were weaker than the projections made by Chinese authorities.

This week ahead: Trade, CPI, PPI, and Credit Data Expected to Improve

Exports and imports expected to slow their pace of deceleration

Based on trading partners’ import data, China's decline in exports is expected to moderate to -7.5% Y/Y in September, from -8.8% Y/Y in August. The decline in imports is also projected to moderate to -6.0% Y/Y in September from -7.3% Y/Y in August, as implied by trading partners’ export data and the impact of higher energy and commodities prices.

Recovery from deflation

September CPI inflation is projected to increase further into positive territory, accelerating to +0.2% Y/Y in September from +0.1% in August. Higher energy prices and manufacturing product prices may have contributed to the rise in consumer prices. PPI deflation is expected to slow to -2.4% Y/Y in September from -3.0% Y/Y in August.

Anticipated increase in new RMB loans

In a Bloomberg survey, the median forecast projects new RMB loans to rise to RMB 2,500 billion in September from RMB 1,358 billion in August, primarily due to seasonal factors. Aggregate financing is expected to increase to RMB 3,750 billion in September, compared to RMB 3,123.7 billion in August.

Will China revert to the strategies outlined in the Third Plenary Session of the 18th Central Committee in 2013?

The most significant positive development for the Chinese economy in the next five or ten years could very well hinge on this decision. It won't involve any fiscal or monetary "bazooka" package; instead, it would mark a return to the principles of "deepening reform comprehensively" and "deepening economic system reform by emphasizing the decisive role of the market in resource allocation," as articulated in the “Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform (the “Decision).”  This potential course of action is one window of opportunity, albeit with a low probability yet extremely high impact, that could open during the Third Plenary Session of the 20th Central Committee of the Communist Party of China (the "3rd Plenary Session of the 20th CCCPC"), expected to convene in late October or early November.

In his “Explanation of Decision of the Central Committee of the Communist Party of China on Some Major Issues Concerning Comprehensively Deepening the Reform” delivered in November 2013, General Secretary Xi Jinping underscored the increasing significance of the "market" in the years leading up to the "3rd Plenary Session of the 18th CCCPC." In 1992, at the 14th National Congress of the Communist Party of China, the goal of reforming the country's economic system to establish a socialist market economy was proposed. It was suggested that "the market should play a basic role in resource allocation under the macroeconomic control of the state." This idea was reiterated at the 15th National Congress in 1997. Subsequently, the 16th National Congress in 2002 called for "enhancing the market's basic role in resource allocation to a greater extent." The 17th National Congress in 2007 aimed to "further harness the market's basic role in resource allocation through institutional reforms." Finally, at the 18th National Congress in 2012, the Party advocated "expanding the market's basic role in resource allocation to a greater extent and across broader domains." Then, at the 3rd Plenary Session of the 18th CCCPC in 2013, the CCCPC decided to replace the term "basic role" of the market in resource allocation with "decisive role."

Within Sub-section 1.3 of the Decision, it is explicitly stipulated that:

“Economic system reform is the focus of deepening the reform comprehensively. The underlying issue is how to strike a balance between the role of the government and that of the market, and let the market play the decisive role in allocating resources and let the government play its functions better. It is a general rule of the market economy that the market decides the allocation of resources. We have to follow this rule when we improve the socialist market economy. We should work hard to address the problems of market imperfection, too much government interference and poor oversight.

We must actively and in an orderly manner promote market-oriented reform in width and in depth, greatly reducing the government's role in the direct allocation of resources, and promote resources allocation according to market rules, market prices and market competition, so as to maximize the benefits and optimize the efficiency. The main responsibility and role of the government is to maintain the stability of the macro-economy, strengthen and improve public services, safeguard fair competition, strengthen oversight of the market, maintain market order, promote sustainable development and common prosperity, and intervene in situations where market failure occurs.”

The Decision encompasses a total of 60 sub-sections distributed across 16 sections. The initial 26 sub-sections are dedicated to marketization and opening up the economy. While some may dismiss these as mere rhetoric, the China Pathfinder, a collaborative research project between the Atlantic Council's GeoEconomics Center and the Rhodium Group, which offers a comprehensive evaluation of China's economic systems relative to advanced market economies, asserts that the Decision was:  "

“was the intended course in the Xi era …-at the beginning. Over the following years, Beijing made significant efforts to implement the plan…The motivations for serious reform were clear: if they were not achieved, President Xi himself penned, China would find itself in a blind alley.”                                               China Pathfinder: 2023 Annual Scorecard, p.6

However, the research conducted by the China Pathfinder concludes that the envisioned economic reforms articulated in the Decision eventually failed to materialize as "political priorities took precedence."

Upon scrutinizing the 60 sub-sections of the Decision, it becomes evident that they remain highly pertinent to the economic challenges confronting China today. The imperative to bolster overall comprehensive productivity, with the market assuming a decisive role in resource allocation, and thereby augmenting China's growth potential, remains a fitting prescription.

At the upcoming 3rd Plenary Session of the 20th CCCPC, it remains uncertain whether General Secretary Xi will return to the playbook he introduced a decade ago when he first assumed power. At that time, he outlined a comprehensive pro-market blueprint for China's economic reform and development. If it weren't for the imminent convening of the 3rd Plenary Session of the 20th CCCPC, the idea of revisiting the Decision's playbook could be one of our annual Outrageous Predictions for 2024. Although it holds a low probability, it is not entirely out of the realm of possibility for Xi to revisit this playbook from a decade ago as a means of extricating China from its economic challenges, to an extent that fiscal or monetary stimulus measures cannot achieve. Ultimately, without a growing economy, comprehensive national power, national security, and even the legitimacy of the political regime become questionable. The potential rewards at stake might be significant enough for Xi to consider altering his course.