China Research

Without doubt, the People’s Bank of China (PBoC) has been very active with its fresh attempt to stimulate the sluggish economy. However, monetary policy should not be regarded as the main tool to revive growth – not fiscal policy either. Instead, far-reaching structural reforms are badly needed in China to restore confidence of consumers and investors. Monetary policy alone is not strong enough to sizeably create new consumer confidence.

Largest stimulus package since the bad days of covid-19

The latest monetary stimulus package by the PBoCindicates clearly that China’s political leadership has become increasingly concerned about the (gloomy) outlook for the economy which is partly linked to the highly burdened real estate sector as well. Different measures to reduce borrowing costswere introduced. For example, the People’s Bank of China cut interest rates on existing mortgages and created new lending capacity by reducing cash requirements for banks. The PBoC also announced that the necessary deposit for buying a second home will be lowered from 25% to 15%, and that restrictions on borrowing for investments in stockswill be easened.

Usually, I consider increasing Chinese worries about the economic development already after reliefs of cash requirements only. This time, instead, a whole package of monetary easening was introduced. This should probably be interpreted as further growing political leadership worries aboutthe chances of meeting the 5% GDP-growth target for 2024. 

Sure, one may wonder about the real size of these political leadership worries when reading on the same day of the announcement of the stimulus package that “in general, the national economy maintained stability while making steady progress in August. Production and demand sustained a recovery, and employment and prices remained stable” (see here about the economic data in August https://www.chinadaily.com.cn/a/202409/24/WS66f1ee40a3103711928a9532.html). Real official belief in the above-mentioned economic analysis for August would not have made the recent central bank measures necessary…

Will the stimulus package help?

The answer to the question above seems to be obvious – no or not enough. Some possible – but certainly limited – relief on the real estate market cannot function as a real growth stimulator when relating to all the structural imbalances in the Chinese economy. There are bad bank loans, largely indebted municipalities and provinces, high implicit state-government debt, unprofitable state-owned companies, subsidized pricing in many areas, insufficient competition, tensions with important trading partner countries, all the institutional shortcomings, the influence of the almighty CP on the whole Chinese economy, etc.

Conclusion: The absence of urging structural reforms in many imbalanced areas of the Chinese economy and society hardly can enable uncertain consumers to raise their mood visibly with following GDP-improving effects. Central bank measures cannot do the job alone – not either this time. At least not when it comes to GDP in reality.

Hubert Fromlet

The Third Plenum of the Chinese Communist Party’s Central Committee uses to be an important event. In the past, Third Plenums have taken place in fall following a Party Congress – with focus on the political leadership’s future economic and reform agenda.

The first – in my view – really memorable Third Plenum goes back to its number 11 in 1978 when China’s groundbreaking visionary leader Deng Xiaoping started up China’s famous process of economic reforms and opening-up, and, consequently, its modernization – with agriculture, industry, defense, science and technology as the main areas for the future.

This time, the Third Plenum happened in July, sending again quite a number of messages to the Chinese people and the rest of the world. But what do the messages tell us this time – or not?

Disappointments after the 18^th Third Plenum

The credibility and outcome of this year’s Third Plenum still has characteristics of a conundrum. However, I do remember very well the plans and visions of the Third Plenum from 2013. Initially, I then had a feeling that China really might be on the way to a promising economic policy. Quite a number of modern guidelines and objectives could even having been picked from famous Western economic research and textbooks.

One could read in the plenum documents almost eleven years ago that the market economy should play a “decisive” role in the Chinese society – at the time frequently quoted around the globe, particularly since it was the first Third Plenum of China’s then new political leader Xi Jinping (and the 18^th in its history). Good intentions could be found in November 2013 as the following summary showed us  (https://www.cliffordchance.com/content/dam/cliffordchance/briefings/2013/12/the-cpc-third-plenum-announces-a-new-roadmap-for-reform-in-china-an-overview.pdf).

However, when checking all the details from the Third Plenum in 2013, one can now recognize that many envisaged or promised objectives from this policy convention have not been met and partly rather developed into the negative opposite during the following years. A deepening look into the quoted summary above – by the way prepared by the law firm Clifford Chance – should indicate or confirm that many officially strived policy improvements did not come true or did so only partly. In my eyes, the failure of giving the market economy a “decisive” role looks particularly disappointing. Rather the opposite could be noted during the past decade.

The question marks after the 20^th Third Plenum  

The 20^th Third Plenum was concluded this summer on July 18. The official communique confirms also this time the long-term visions and supremacy of the Communist Party (http://en.cppcc.gov.cn/2024-07/19/c_1006186.htm).

When reading this communist party document, “everything“ seems to have developed well in the past years and been put on the right track for the foreseeable future.

Thus, the poor or at least insufficient current economic development is not discussed in the communique. Self-criticism seems to be more or less absent apart from a few general statements like “complex developments at home and abroad”; instead, formulations such as “we have achieved economic recovery and growth and have made firm strides in building a modern socialist country in all respects” look more representative for the pitch of the communique from this year’s Third Plenum.    

Nonetheless, it should be worthwhile to quote the following conclusion from the communique, i.e. that
“ the Central Committee made systematic plans for further deepening reform comprehensively with the emphasis on building a high-standard socialist market economy, promoting high-quality economic , supporting all-around innovation, improving macroeconomic governance, promoting integrated urban-rural development, pursuing high-standard opening up, advancing whole-process people’s democracy, promoting socialist rule of law with Chinese characteristics, deepening reform in the cultural sector, ensuring and improving the people’s wellbeing, deepening reform in ecological conservation, modernizing China’s national security system and capacity, deepening national defense and military reform, and improving the Party’s leadership in further deepening reform comprehensively to advance Chinese modernization…”                                       

—> whatever all this could mean for the future.

 Altogether, we can be quite safe about drawing the following six conclusions from this year’s Third Plenum:

1. China will keep its political top-down governance of the economy;  
2. science and advanced technology play a growing role in the future;
3. there is no recognizable strategy for the different future challenges;
4. macroeconomic analysis and future policy approaches are still absent;
5. the environment continues to play an important role;
6. there is no clarifying strategy for China’s complicated overcapacity issue, the demographic challenge and the fight against (youth) unemployment.

Hubert Fromlet Affiliate Professor at the School of Business and Economics, Linnaeus University
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