Beijing will continue deemphasizing short-term growth to achieve Xi Jinping’s long-term goals
The Third Plenum, a pivotal meeting to determine China’s strategic direction for the next five years, concluded on July 18th. The statements released in the days following the conference show a firm commitment to “Chinese-style modernization,” cementing a shift from prioritizing rapid economic growth to achieving Xi Jinping’s broader goals.
Business Implications
The Third Plenum’s results present mixed implications for businesses over the medium term. The government is likely to change the legal retirement age, begin mandating maternity and paternity leave, and start increasing pressure on corporations to raise wages (particularly for lower-income workers), all of which will impact workforce planning. Additionally, because China’s leadership remains focused on spurring production over consumption, companies should expect geopolitical tensions to continue mounting with the US, Europe, and others.
In the wake of the Third Plenum, B2C companies should adopt conservative demand projections for the coming years. The government shows little intention of spurring domestic demand or addressing the real estate crisis in ways that would boost confidence. Instead, leaders intend to increase consumption taxes, a move that should help to address longstanding issues in government financing but may also weigh on consumption.
Meanwhile, B2B companies should expect continuity in the current business environment. Continued investment in production without regard to profitability considerations will maintain downward pressure on factory pricing, while lagging domestic demand will continue driving companies in China to seek export markets. Executives may find opportunities in sectors prioritized by the government (e.g., new energy, advanced equipment, biomedicine); however, they will have to navigate an inherently political environment to do so.
B2G companies are likely to see substantive changes in funding flows due to a series of reforms that should ease pressure on local governments’ financing. However, the timelines for these shifts are uncertain, the details of the government’s plans are still vague, and the ultimate responsibility for different types of expenditure may ultimately change, so executives should remain cautious about making any major adjustments until more specific policies are announced.
Key Implications for China’s Outlook
- Economic Growth: China’s growth is set to continue decelerating as its leaders prioritize “high-quality development” over reversing the current slowdown. The government continues to show little interest in spurring domestic demand to drive growth. Additionally, it has indicated that it will treat the real estate sector primarily as a risk to be managed, so unless the property market’s slump begins to impact social stability, it is unlikely to implement additional supportive policies. As a result, sentiment among consumers and businesses is set to remain subdued.
- Economic Structure: The government’s policy blueprint includes initiatives to enhance supply chain resilience and promote advanced manufacturing through tax reductions and targeted subsidies. Strategic sectors such as high-tech manufacturing will likely see increased private investment and resource allocation, alongside significant support for education, science, technology, and talent development. While the Third Plenum documents suggest the government intends to “better leverage the role of the market”, they also indicate a desire to increase state-owned enterprises’ market share in industries critical to national and economic security.
- Fiscal and Tax Reforms: The real estate sector’s decline has opened a hole in local governments’ finances, creating substantive pressures on their expenditure. The Third Plenum documents suggest that the national government will begin easing those pressures through multiple channels. First, it will reform the consumption tax regime to increase local government revenues and incentivize more efficient tax collection. (It will likely expand the consumption tax’s scope as well.) Second, it will give local authorities more autonomy to seek out new revenue sources and adjust policies to fit their circumstances. Third, it will shift selected spending responsibilities and corresponding decision-making authority from the local to the national government level. Unfortunately, without further details, it’s difficult to judge how this effort will play out. While the goal will be to maintain the overall tax burden at levels seen before the real estate downturn, the actual outcome remains uncertain.
- Geopolitical Tensions: In previous Third Plenum documents, military-related terms seldom appeared. In this year’s statement, they featured prominently and were positioned next to topics such as “Taiwan” and “diplomacy”. Furthermore, the documents state that China intends to “enhance the protection of overseas interests and investments” and “participate in leading the reform of the global governance system”. This shift not only exhibits the growing importance of national security in China’s governance but also suggests that relations between China and the West will remain tense.
In sum, the Third Plenum cements a strategic pivot in China’s policy framework and underscores a significant transformation in its developmental approach. The country’s leaders will remain focused on “Chinese-style modernization” aligned with Xi Jinping’s vision, even if it means sacrificing short-term economic gains. Businesses and investors should align their strategies accordingly to navigate the evolving economic landscape.
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