INSIGHT: China maps out economic strategy to wiggle out of slump

SINGAPORE (ICIS)–China kicked off a major meeting in Beijing on Monday to map out the economic future of the world’s second-biggest economy, whose recovery is being hindered by a property slump now on its third year, and a manufacturing overcapacity.

• Q2 GDP growth slows to 4.7%
• Fiscal reforms, US/EU protectionism, private sector promotion to be discussed
• Government may push for more affordable housing measures

The Communist Party of China (CPC) is holding a third plenary session or plenum since the members were elected in October 2022, in the Chinese capital from 15-18 July.

The pivotal meeting began just as China reported a slowdown in annualized GDP growth in the second quarter at 4.7% from a 5.3% pace in the January-March 2024.

The world awaits policy announcements from the closed-door meeting, in which Chinese leaders are expected to discuss fiscal and tax reforms, strategies to counter protectionism from the US and EU, promotion of domestic private sector, and address the country’s ailing real estate market.

The third plenum typically sets China’s economic agenda over the medium term, with Xi Jinping serving his third term as Chinese president.

The CPC’s Central Committee typically holds seven plenary sessions during its five-year term, with the third plenum typically garnering significant international interest.

China is currently on its 14th Five-Year Plan, which covers 2021 to 2025.

“The third plenum is in the middle of the five-year plan of the Chinese Communist Party and therefore is unlikely to witness major policies,” Alex Ng, founder and head of research at Hong Kong-based Fortress Hill Advisors, said in a note for investment research and analysis firm Smartkarma.

“Rather, there will be fine-tuning of existing policy direction and some sector-specific measures.”

The third plenum was delayed from late-2023 as Chinese leaders have had to grapple with a multitude of domestic and external headwinds.

First-quarter annualized economic growth was robust at 5.3%, driven by strong manufacturing and industrial output, despite patchy consumer spending.

However, second-quarter GDP growth has slowed to 4.7% as consumption weakened, official data showed on Monday.

China’s government has already taken measures to stabilize growth further this year.

In March, the country’s State Council issued an action plan to promote large-scale equipment renewals and trade-ins of consumer goods.

This was followed by the latest property rescue package in mid-May, comprising of both supply and demand side measures.

KEY AREAS TO WATCH
A resolution will be presented at third plenum focused on “comprehensively deepening reform and advancing Chinese modernization”, aiming to establish a “high-level socialist market economy” by 2035, according to an official CPC document.

“This indicates that the focus of the reforms will be on promoting long-term high quality economic development that centers on innovation, technology, green transition and the people,” said Ho Woei Chen, economist at Singapore-based UOB Global Economics & Markets Research.

“The youth unemployment, ageing population, hukou system and promotion of domestic consumption may also come into the picture.”

FISCAL AND TAX REFORM
With local government’s revenue from land sales drying up and a high debt overhang, the central government will need to transfer more resources to the local governments and broaden their income sources, Ho said.

This would help to sustain the economic recovery as the local governments oversee stimulating their own regional growth, leading to more equitable development, she said.

“Reforms to the consumption tax and a broad-based property tax to provide steady income streams for local governments could be considered,” Ho said.

China’s central government collects the majority of the country’s revenue but allocates most of it to provincial and local governments, which are responsible for the majority of government expenditures.

This leaves local governments strapped for cash, especially with the struggling property market. As a result, many local governments are now facing a serious debt crisis.

EYES ON PROPERTY MEASURES
While the continuing property market downturn requires further attention from the government, new stimulus measures are unlikely to be unveiled at the third plenum.

China announced its latest rescue package for the property market in May.

The measures to-date have relaxed buying restrictions and downpayment requirements, reduced the borrowing costs and established a yuan (CNY) 300 billion ($41 billion) re-lending program for social housing.

Nonetheless, the government could reiterate the direction towards affordable housing market, including the conversion of unsold homes into affordable housing.

As of end-2023, the housing ministry has achieved two thirds of its target to provide 8.7 million units of government-subsidized rental housing in the 14th five-year plan for 2021-2025.

NEW FORCES FOR PRODUCTIVITYDuring a visit to Heilongjiang province in September 2023, China President Xi urged the nation to mobilize “new quality productive forces” to stimulate economic growth.

This refers to the promotion of new growth drivers for the economy, specifically innovation in advanced sectors and industrial system modernization, alongside the upgrading of traditional sectors such as property and lower value-added manufacturing and assembly to enhance efficiency and sustainability.

Xi emphasized that China wants quality growth and not just high growth for its economy.

This was clearly the CPC’s top priorities at this year’s National People’s Congress (NPC) in March, critical for its economic sustainability, stability, and security.

CPC officials have also emphasized education, the development of science and technology in its efforts to build a modern industrial system.

Insight article by Nurluqman Suratman

($1 = CNY7.26)

Thumbnail image: Large machinery loading containers onto the China-Europe freight train in Lianyungang, China, on 14 July 2024.
(Costfoto/NurPhoto/Shutterstock)