Policies are likely to focus on major economic issues that are well understood
Multinationals can expect some level of stabilization in China’s growth trajectory following the upcoming Third Plenum in July. Leaders will likely offer direction on how they intend to overcome some of the country’s thorniest issues, context that will be helpful to multinationals’ strategic planning over the next few years. Thus, any company facing a major planning decision that can be postponed for 2–3 months would be well advised to wait until after the meeting.
The Third Plenum’s implications for multinationals’ operations could significantly differ across sectors.
- Healthcare companies, which traditionally depend on a stable and healthy government relations environment, may face a radically different funding landscape in terms of government procurement if the Third Plenum makes notable changes to China’s current fiscal and taxation system. Consequently, they should pay close attention to the Plenum’s outcome and seek expert opinions to better understand the potential impact on their businesses.
- B2B companies are likely to see uneven impacts depending on their customer bases. It is highly unlikely that the Third Plenum will alter existing policies supporting manufacturing. However, firms involved in government procurement should be particularly alert to potential changes in local government funding methods, if any. This is especially relevant for those who sell directly to governments at various levels.
- B2C firms are less likely to be directly affected by the Third Plenum. Nevertheless, they should still seriously consider advice from government relations specialists, either in-house or from third-party sources, who should be able to provide a timely analysis of how China’s leadership views the role of households and real estate evolving over the next few years.
Overview
- In July, the Chinese Communist Party’s Central Committee will hold its third plenum since the 20th Party Congress in 2022. This date was announced following a regular monthly meeting of the 24-member Politburo that took place just prior to the Labour Day holidays.
- Traditionally, the Third Plenum takes place in October or November of the year following the standard five-year Party Congress interval (with the exception of the last one, which was held in February 2018). Holding it in July 2024 marks the first time in over three decades that it is being conducted outside its typical schedule.
- The Third Plenum typically sets the economic strategy for the next five to 10 years (again with the exception of the last one, which focused on government reforms) and is frequently viewed as the most crucial Plenum in the Central Committee’s five-year cycle.
- According to the official Xinhua News Agency, the Third Plenum will involve comprehensive discussions on deepening reforms and advancing Chinese-style modernization, which are key elements of President Xi’s third-term agenda.
Our View
The postponement of the crucial Third Plenum from last year sparked a significant amount of speculation and needlessly heightened uncertainties about China’s entire political and economic environment. Nevertheless, as the timeline has finally emerged, hopes are rising that Chinese leadership will seize this opportunity to reinforce the message of “reform and opening up,” quelling growing skepticism of China’s commitment to economic growth and re-establishing confidence in the country’s development.
Details are always sparse before these once-every-five-years gatherings of high-level party leaders. While unlikely, unexpected events could occur in the next two months and alter the agenda of the Plenum. However, our current perspective is that dramatic surprises are unlikely in terms of new economic policies, given what’s already been announced in several top-level meetings over the past six months. A significant deviation from the current course is highly improbable.
The economy will almost certainly be the central focus of the Plenum, with delegates likely discussing the troubled real estate sector—widely seen as a pressing issue for China’s economy. Early indications suggest that one of the emphases could be on de-stocking, particularly in lower-tier cities, and the Third Plenum will likely further bolster the leaders’ endorsement of this approach. While details are scant, we believe that one likely outcome could be increased state control over the sector.
The issue of local governments’ debt is another concern likely to be addressed at the Plenum. After all, the disparity between central and local governments’ revenue streams and financial obligations is a key factor contributing to the perilous financial state of local governments today. The meeting output will likely provide a high-level indication of how China’s overarching fiscal and taxation system will be reformed. While leaders may not provide specific details and numbers (e.g., % of tax revenues going to central and local governments, the exact expenditures that local governments must shoulder, etc.), their directional guidance should be useful in evaluating future fiscal policies.
In addition to these topics, state media has suggested that the Third Plenum will discuss how to implement comprehensive reforms to advance so-called “Chinese-style modernization.” The precise meaning of this term, however, remains ambiguous and open to interpretation. Overall, we do not anticipate any significant changes in the direction of China’s growth outlook. What’s more probable is that the Third Plenum will reinforce many of the official messages that have already been announced and offer slightly more direction. This is largely due to the fact that the path for China over the next five to 10 years was already set at the 20th Party Congress in October 2022.
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