China plays down hopes for ‘strong medicine’ at top economic policy meeting

Peng, an employee at a Chinese state-owned media outlet in Beijing, is reeling after being forced to take her second pay cut in less than a year, as the country’s economic weakness hits even its government enterprises.

“I can barely live on this,” she complained. “The work keeps increasing, but the money keeps decreasing.”

Peng’s situation, which is mirrored across China as the economy struggles to recover from a property crisis and the pandemic, illustrates the challenges facing President Xi Jinping’s government as it prepares to hold one of the Communist party’s most important quinquennial meetings this month.

In the past, the Chinese Communist party has used the third plenary session of its central committee, its elite leadership body, to address the most important economic issues of the day. In 1978, Deng Xiaoping used the meeting to launch China’s post-Mao Zedong-era “reform and opening up” drive.

Some experts argue similarly bold action is needed now to kick-start domestic demand and prevent the world’s second-biggest economy from falling into a deflationary spiral. But at a recent World Economic Forum event known as the “summer Davos” in the north-eastern seaside city of Dalian, Premier Li Qiang signalled that no shock therapy would be forthcoming.

In the wake of the pandemic, China’s economy was like a patient recovering from a serious illness, Li said. “According to Chinese medical theory, at this time, we cannot use strong medicine. We should precisely adjust and slowly nurture [the economy], allowing the body to gradually recover”.

China’s headline growth was solid in the first quarter, expanding 5.3 per cent on the year before, driven by manufacturing and industrial output, although consumer spending remained patchy.

Analysts have been scrutinising recent speeches by Xi and other leaders for signals of Beijing’s policy direction over the next five or more years that could be unveiled at the conclave, which will be held from July 15 to 18.

Possible areas of focus include Xi’s “new quality productive forces”, party jargon that analysts believe refers to advanced technology, green energy industries and upgraded manufacturing, as well as fiscal and social welfare reforms, changes to China’s hukou household registration system and efforts to reinvigorate private sector confidence.

The central committee — which currently consists of 205 full members and 171 alternates appointed at the party’s 20th congress in October 2022 — generally convenes seven plenums over its five-year term. The third meeting attracts particular international attention because of past pronouncements on economic policy.

“The base case is that this third plenum will not mark a fundamental departure from the course Xi has already laid out,” said Gavekal analysts Andrew Batson and Wei He in a research note.

“Its official agenda is to study ‘advancing Chinese-style modernisation’, Xi’s term for pursuing his vision of national greatness, in which technological self-sufficiency and national security outweigh economic growth.”

New productive forces is one such example. Xi this year linked his industrial production strategy, which has prioritised investment in sectors such as electric vehicles, batteries, semiconductors and biotech, to the concept of total factor productivity, a measure of economic output not driven by increases in inputs such as capital and labour.

This has raised hopes among economists of a more market-driven approach to growth. But Gavekal argued there was no indication the state would reduce its role in the economy. Beijing still wants to “direct the allocation of resources to achieve the policy goals of industrial upgrading and technological innovation”, Batson and Wei said.

Fiscal reform, however, is one area where there could be change, analysts in Beijing said.

China’s central government only accounts for about 10 per cent of total government spending, compared with a global average of about 20 per cent. Yet Beijing controls a disproportionate amount of revenue compared with local governments. This has contributed to a debt crisis in many local governments, which have struggled to raise revenue amid the property crisis.

“The main direction of the reform to take place is how to increase the percentage of central government spending in the whole country’s expenditure,” economists at one government-linked think-tank said.

On pension reform, businesses will be closely watching for any hint of delays to the retirement age, which is among the lowest in the world, at 60 for men, 55 for women in white-collar work and 50 for women in manual work.

As demographic decline sets in — China’s population shrank for the second year in a row last year — policymakers need to find ways to mitigate the growing fiscal burden of pension payments, experts have warned.

Further relaxation of the hukou household registration regime — which restricts people from fully accessing public services outside their home cities — could fuel more urbanisation and aid the struggling property market.

But some observers argued that Xi was unlikely to fully dismantle hukou, which prevents the overcrowding of “first-tier” cities, especially Beijing and Shanghai, and provides the party with control over population flows.

Some businessespeople hope for sweeteners for the private sector, such as lifting limits on foreign shareholding in some industries, to revive spirits damped by crackdowns on the property and ecommerce sectors.

Others are also still seeking a decisive response to the property crisis. The government has launched schemes to directly intervene in the market by buying unsold inventory, but its measures have failed to lift confidence. The third plenum could be a good forum for a ‘big bang’ announcement on real estate, some analysts suggested.

“In an upside scenario . . . forceful policies could be hinted at or even introduced in the third plenum,” said Yifan Hu, chief investment officer at UBS Global Wealth Management.

But most observers admit this is unlikely, cautioning that the main focus will be continuity as Beijing tries to transition from a debt-fuelled, high-growth economic model driven by real estate and infrastructure to one marked by investment in high-tech industries and the green transition.

“We should not expect too much around the third plenum,” said one prominent economist with a government think-tank.

The economist added that markets were already anticipating a muted meeting. The Shenzhen and Shanghai stock indices have slumped 1.6 per cent since Li Qiang’s remarks in Dalian.

For Chinese citizens seeking relief from salary cuts and job losses, that is not good news. State media worker Peng said austerity was evident in all levels in her organisation.

One of her bosses recently had his salary slashed by 35 per cent, which “left him unable to keep up with his monthly mortgage payments”, she said.