The Old is New Again: China’s Third Plenum Likely to Be Redux of Supply-Side Reform

ANALYSIS

The Third Plenum has historically been the platform for major reform announcements. For instance, in 1978, the party announced Deng Xiaoping’s opening up reforms, while in 2013, officials said they would let the market play a decisive role in resource allocation. Given the weight of the platform, analysts are watching the plenum closely for major reforms and policy changes. Yet, current signals from the party suggest that policy continuity is the more likely outcome.

Under Xi, China’s focus on supply-side reform (ie production-focused reform) has endured and strengthened. Even with weak macroeconomic spending and flat consumer spending in 2024, the party is unlikely to heed calls from business circles for the deployment of direct support to households.

Industrial Policy

Industrial policy is likely to see minimal changes. Party officials continue to reiterate concepts like dual circulation and new quality productive forces that indicate China is will continue to develop self-sufficiency in key industries and higher quality growth through innovation. While key political and business figures have called for the government to play a more active role in providing direct economic aid to the citizenry,  it remains unlikely that Beijing will sustain a meaningful level of direct support to consumers. This persistent focus on supply-side policy comes up against the comparative lack of domestic demand for those goods, fueling US and EU concerns of overcapacity.

Fiscal Policy

Debt strains on local governments have grown increasingly acute in the past few years, exacerbated by the real estate downturn and loss of land income. The central government hinted it would consider reforms to the central-local tax distribution, which could include raising taxes on consumption or VAT that diversifies local tax revenue from the property sector. The central government may also take on more expenditure burdens from the local government. More fiscal space will allow local governments to spend on public services, welfare, and assist local SOEs and firms that help boost economic confidence.

Private Sector Sentiment

The Third Plenum also plays the critical role of facilitating Party announcements on key organizing concepts, like the relationship between the government and the market, and between security and development. Statements that elucidate how the Party intends to govern the private sector will be critical in drumming up or diminishing business sentiment, especially given the crackdowns on private firms in the name of security over the past few years.