（Wo-chiang Lee, Professor, Department of Banking and Finance, Tamkang University)
The Third Plenary Session of the 20th Central Committee of the Communist Party of China (CPC) was concluded on July 18. At the Session it discussed and adopted the Resolution of the Central Committee of the Communist Party of China on Further Deepening Reform Comprehensively to Advance Chinese Modernization and it stated that the reform tasks laid out in this resolution shall be completed by the time the People's Republic of China celebrates its 80th anniversary in 2029. It will pose profound influence for the future developments of China’s politics, economy and military. According to the statistics released on the day of the Session, the economic performance in the first half of this year did not improve as expected and the future direction of its economic development attracts significant attention.
From further analysis based on the latest statistical figures released by China’s National Bureau of Statistics (NBS) on July 15, China’s Gross Domestic Product (GDP) for the second quarter of 2024, adjusted for price changes, grew 4.7% compared to the same period last year. It was lower than the market expectation of 5.1% and marked the weakest performance in the past five quarters. The GDP of the first quarter increased 5.3% while it grew only 4.7% in the second quarter, resulting in an estimated 5% growth for the first half of this year.
The three economic drivers (three carriages) including investment, foreign trade, and consumption, all have fallen short of expectations. The total retail sales of consumer goods increased 3.7% year-on-year, with the retail sales related to household consumption increasing 2% year-on-year in June, the slowest rate since December 2022. The year-on-year growth in national fixed asset investment (excluding rural households) was 3.9%, a modest figure. The sales area of newly constructed commercial housing across the entire country declined 19% year-on-year, and the sales revenue decreased 25%, indicating that the real estate market has not yet improved and continued to weigh down investment. Total exports increased 6.9%, indicating that the momentum in export is still strong, but imports have shown weakness. Both industrial and manufacturing sectors are adopting conservative attitude for the future. The official Manufacturing Purchasing Mangers’ Index (PMI) has fallen below the boom-bust line. The annual growth rate of the service production index has dropped to 3.5% in April and 4.8% in May from the 5.5% of the first quarter, showing insufficient demand.
In the first half of this year, the national survey on urban and rural unemployment rate averaged 5.1%, a decrease of 0.1% from the first quarter and 0.2% from the same period of last year, suggesting a limited improvement in the labor market. The Consumer Price Index (CPI) increased only 0.2% year-on-year in June, indicating that consumer purchasing power is insufficient and deflationary pressure persists. J.P. Morgan has expressed that China’s GDP report for the second quarter and economic activity figures of June indicated that its economy still remains “fragile, unstable, and uneven.” As a result, they have revised down their GDP growth expectation for 2024 to 4.7%, lower than the previous estimate of 5.2%. In contrast, the International Monetary Fund (IMF) updated its World Economic Outlook Report on July 16, raising its forecast for China’s economic growth this year to 5%.
The government has described the economy for the first half of this year as “stable overall operation, steady progress in stability, accelerated growth of new drivers, and new progress in high-quality development.” But this author believes that China’s economy is currently at the juncture of transitioning from old to new, with various issues of old economy yet to be addressed and insufficient drivers in the new economy. It has resulted in an unstable recovery, leading to fluctuating economic figures in recent times, sometimes optimistic and sometimes pessimistic. The decline in the second quarter can be attributed to the continued sluggish real estate sector as well as the damage caused by floods in the south and droughts in the north since April. Given this, there are still numerous medium- to long-term economic challenges in China, including a prolonged downturn in real estate sector, increasing local government debt, weak consumer spending, significant salary cut and even layoffs in the financial industry. There are also challenges like aging population, increasing costs for social security such as pensions and medical care, and the transformation and upgrading of the manufacturing sector. According to reports, the Suzhou Municipal Bureau of Administrative Affairs Management of Jiangsu Province has recently issued a notice containing 10 measures that specifically require the entire city to further implement a “strict frugality” in the management of administrative affairs. The measures include comprehensive sharing and utilization of meeting rooms and public service facilities, and no scrapping of official vehicles less than ten years old. The Provincial Public Security Department of Zhejiang Province has also issued “26 measures for the department to practice strict frugality and live thriftily.” They include encouraging dining in the department’s canteen, reducing the quota for office supplies by 10% annually, and strictly regulating conditions and temperature settings for air conditioning. It reflects the financial difficulties faced by local governments.
As mentioned above, China is in the juncture of economic structural transformation from old to new models, and it surely will be influenced by several variables to achieve the growth goal of 5% this year. Xi Jinping has stressed again “the ultimate goal of further comprehensive deepening reform is to continue to improve and develop socialism with Chinese characteristics and to advance the modernization of national governance system and governance capability.” It implies that China will comprehensively establish a high-level socialist market economy system by 2035, further perfect the socialist system with Chinese characteristics, fundamentally realize modernization of the national governance system and governance capability, and basically achieve modernization of socialism, laying a solid foundation for China to become a modernized socialist power by the middle of this century. Therefore, "comprehensive deepening reform" and "Chinese modernization" are extremely significant keywords.
In the “Communique of the Third Plenary Session of the 20th Central Committee of the Communist Party of China (the Communique),” it further outlines a systematic deployment on how to comprehensively deepen reform. They include highlighting the construction of a high-level socialist market economy system, perfecting a mechanism to promote high quality economic development, building a mechanism to support comprehensive innovation, strengthening macro-economic management, improving the institutions and mechanisms for urban-rural integration and development, improving the institutions and mechanisms for a high-level opening up, strengthening the system of whole-process people’s democracy, improving the socialist rule of law system with Chinese characteristics, deepening reform on the institutions and mechanism for culture, perfecting systems for ensuring and improving people’s lives, deepening reform on ecological civilization system, advancing modernization of national security and capabilities, and persistently deepening reform on national defense and military.
As outlined in the Communique, the future economic policy and guideline will focus on implementing high quality development as the primary task in building China into a modern socialist country in all respects. It is essential to use the new development philosophy to steer reform in the new stage of development. It must deepen supply-side structural reforms, improve incentive and constraint mechanisms for promoting high-quality development, and strive to create new growth drivers and strengths. It also stresses the need to improve the institutions and mechanisms for fostering “new quality productive forces” in line with local conditions, for promoting full integration between the real economy and the digital economy, for developing the service sector, for modernizing infrastructure, and for enhancing the resilience and security of industrial supply chains.
In general, the reform policies revealed during the Session mostly repeat the old approaches, lacking innovation. However, this author believes that the future policy implementation will have the following key points to observe.
1. Xi Jinping initiated “speeding up the formation of new quality productive force” during a local inspection in 2023, which was subsequently elaborated and made significant deployment on several occasions, highlighting its importance. The key to develop new quality productive force is to deepen comprehensive reform, facilitating the smooth flow of various advanced productive elements toward its development. In addition, technology renovation is the core of new quality productive force, leading the journey of economic development driven by renovations and technological advancement. It hopes to build China as a global manufacturing giant in the field of technological innovation, which highlights the importance of artificial intelligence (AI) and the digital economy, and subsequent significant policies are worthy of attention.
2. Green is the basis of high-quality development, and the new quality productive force is a green productive force itself. The green and low carbon economy will become a new trend. In other words, electric vehicles, lithium batteries, and solar cells, the “new trio items,” have gradually become the new export drivers. However, they only accounted for 4.4% last year, and they must continue to expand to become significant engines. It also needs to breakthrough the high tariffs imposed on automobiles and electric vehicles by the US and European countries.
3. In the Session, it also mentioned that “ensuring various ownership economies legally and equally utilize factors of production, participate in market competition fairly, receive equal legal protection, promote complementary advantages and common development among various ownership economies." If a national unified market is to build and an advanced market economy system is to create, it has to increase greater supports for private enterprises, increasing new momentum for economy while making great efforts for reform of state enterprises.
4. The fiscal, tax and financial system needs to improve. As stated in the Communique that “it is essential to improve the macro regulation systems, to pursue coordinated reforms in the fiscal, tax, financial, and other major sectors, and work to enhance the consistency of macro policy orientation. It needs to deepen reform of the fiscal and taxation systems, further reform the financial system, and improve mechanisms for implementing the coordinated regional development.” Objectively speaking, tax reform aims to enhance fiscal transparency and ensure effective budget control. It seeks to provide ample liquidity through monetary and fiscal policies to address challenges like deteriorating local debts and the real estate market. And financial reform serves as a pathway toward becoming a financially strong nation.
5. In the Session, it also stressed that “it is essential to remain committed to the basic state policy of opening up to the outside world and continue to promote reform through opening up, to enhance the capacity for opening up while expanding cooperation with other countries, to 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 reginal opening up, and refine the mechanism for high-quality cooperation under the Belt and Road Initiative.” The focus of this policy should be on attracting domestic and foreign direct investment (FDI) in tangible sectors to help boost economic recovery. But while expanding foreign trade, challenges such as international competition and pressure from alliances led by the US need to be dealt with, and the effectiveness remains to be observed.
（Translated to English by Tracy Chou）
