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China released a comprehensive policy document on Sunday, outlining its ambitions to develop advanced industries and improve the business environment. Analysts, however, noted the absence of imminent structural shifts in the world's second-largest economy. The 60-point document follows the Communist Party's Central Committee meeting, led by President Xi Jinping, which occurs approximately every five years and is known as a plenum.
Held from July 15-18, the plenum took place amid China's economic challenges, including the verge of deflation, a prolonged property crisis, surging debt, and weak consumer and business sentiment. Trade tensions are also rising as global leaders grow wary of China's export dominance. These challenges have led some economists to urge Beijing to shift its focus from a debt-fueled, investment-led model to boosting consumer demand.
Despite these calls, the plenum reaffirmed China's quest for "new productive forces," a term coined by Xi last year that envisions scientific research and technological upgrades of the country's industrial complex. The document aims to "promote revolutionary breakthroughs in technology, innovative allocation of production factors, and in-depth industrial transformation and upgrading." Strategic industries identified include new generation information technology, artificial intelligence, aviation and aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology.
President Xi emphasized that while China's industrial system is large, it lacks strength and refinement, with key and core technologies controlled by others. Initially expected late last year, the plenum was postponed without explanation. Gary Ng, Asia-Pacific senior economist at Natixis, stated that the plenum painted a future of "state-led economic growth, innovation, and security." However, he cautioned that relying heavily on manufacturing and new productive forces is fraught with uncertainties.
The document reiterated the role of markets in resource allocation and the government's commitment to improving conditions for the private sector through fiscal and financial reforms. Other policy targets include boosting affordable housing, improving job opportunities for young people, and enhancing the standard of living for the elderly. However, the document did not specify how these goals would be achieved, many of which require contradictory policies, as Party officials acknowledged.
For instance, Beijing has not clarified how to encourage consumer spending when resources primarily flow to producers and infrastructure, or how to stimulate growth while curbing debt. At a plenum in 2013, Beijing launched a policy agenda with similar goals, including liberalizing financial markets and making domestic consumption a more prominent growth driver. However, a capital outflows scare in 2015 halted many of these plans. Many analysts believe national security considerations have pushed China towards tightening control over large parts of the economy and cracking down on industries such as tech and finance.
One area where new measures are expected soon is local government finances. Policymakers aim to address concerns over municipal debt exceeding $13 trillion, posing risks to financial institutions and economic growth. In 2023, local governments' fiscal revenues accounted for 54% of the nation's total, while their expenditure accounted for 86%. The plenum flagged plans to allow local administrations to retain more of the consumption tax, currently fully transferred to the central government and accounting for nearly a tenth of all revenues. Zhaopeng Xing, senior China strategist at ANZ, stressed the urgency of expanding tax sources for local governments, noting the current fiscal situation is dire.
