Commodities

Why China’s Third Plenum Matters for Global Investors

(Bloomberg)

(Bloomberg) -- Of the countless meetings that China’s Communist Party holds regularly, the Third Plenum stands out for its potential impact on the world’s second-largest economy. The typically once-in-five-years conclave of top officials usually deals with major economic and political policy changes. Paramount leader Deng Xiaoping famously used the 1978 event to announce China’s opening up and pivot to allow market forces to play a role in what was then a Soviet model of central planning. On July 15, President Xi Jinping will convene the closed-door meeting after a rare delay. Investors will be watching closely for any efforts to restart China’s sputtering economic growth engine.

1. What is a third plenum?

A plenum is a full meeting of the Communist Party’s Central Committee. This body officially announces the party’s most important policies and personnel rosters, although in reality it rubber-stamps decisions made by a much smaller group of party elites, chief among them Xi. 

The Central Committee typically meets seven times in its five-year tenure. The third of these plenums is particularly important as it represents the first chance for the new leadership to properly introduce its broad thinking on economic and political issues.

For example, Xi used the conclave in 2013, a year after he became the party’s leader, to introduce plans to further relax the country’s one-child policy, change the household registry system and emphasize national security.

2. Where does it take place? Who is invited?

The meeting, like most important party and state conferences, is typically held at Jingxi Hotel in the west of Beijing. The low-key, gray complex is trusted for its security because it’s directly managed by the Central Military Commission.

Attendees of the third plenum include some 200 full members of the Central Committee, about 170 alternate members, and leaders from the party’s anti-corruption agency. Some academic representatives and other members of the party congress could be invited as well.

The Central Committee members hold key posts not only in the party but across the provincial, municipal and central governments as well as the military and state-owned enterprises. In the current batch, 44 out of 205 are from the army. 

3. What happens at the plenum? Will they vote on policies?

This year, over the course of four days, the officials will discuss policies at private meetings hosted by the Xi-led Politburo, though the real negotiations and decisions are believed to have been made way in advance. 

The outcome of the conference will usually be announced in a communique issued through state media, with details to be published later. 

4. What policies have past plenums produced?

The landmark Third Plenum in 1978 put China on a path of economic development and allowed the private economy to grow after the devastating Cultural Revolution. 

Fifteen years later, top leaders at the same conclave fleshed out plans to build a “socialist market economy,” putting forward policies such as modernizing and revamping inefficient state-owned enterprises, establishing a social security system and reducing the government’s direct intervention in the economy. 

In 2013, the new leadership under Xi outlined ambitious reforms that included further loosening the one-child policy and encouraging private investment into state businesses, as the economy faced headwinds ranging from local government debt to a shrinking working-age population. 

At the last meeting, in 2018, Beijing pledged to restructure the party, government, military and other public bodies and promised to balance the powers of central and local governments. Nominees for top government jobs were also approved at the confab. 

5. What are people expecting from this plenum?

The upcoming session, from July 15 to 18, will review a “resolution on comprehensively deepening reform and advancing Chinese modernization,” according to the official Xinhua News Agency. 

While expectations are low for groundbreaking structural reforms, investors are watching closely for any hints on policy direction to address a broad range of long-term issues including fiscal relations between central and local government, a downward spiral in the real estate market, the embattled private sector, the country’s technology push, and its aging population. 

High on investors’ watchlist is fiscal reform. Top leaders at a key economic meeting in December said they were contemplating a “new round of fiscal and tax reform,” sparking hopes that more details could be unveiled at the Third Plenum. The division of spending responsibilities between central and local government could be restructured, with Beijing taking over more expenditure to drive economic growth, as regions grapple with mounting debt risks and dwindling income from land sales. Some economists expect an overhaul of consumption tax to broaden local authorities’ sources of income, as well as further reforms of value-added tax — the largest source of tax revenue in China. 

Property polices are another area of investor focus, as the real estate downturn remains the biggest threat to the Chinese economy. The State Council, the nation’s cabinet, in June asked officials to keep formulating new policies that will absorb existing housing stock with an “open mind.” That’s stoked anticipation on new steps and additional funding to shore up the market after Beijing in May unveiled a package of measures to rescue the sector, including 300 billion yuan ($41.3 billion) in cheap loans provided by the central bank for local governments to purchase existing housing projects. 

China watchers are also looking out for potential personnel changes. The expulsion of two former defense ministers, Li Shangfu and Wei Fenghe, will be confirmed at the plenum.

Other disgraced officials expected to be ousted from the Central Committee include former Foreign Minister Qin Gang, former Agriculture Minister Tang Renjian and former Rocket Force Commander Li Yuchao. More signs of purges that have roiled China’s defense establishment since last summer could emerge as well. 

©2024 Bloomberg L.P.

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