China’s pledge of economic reform met with cautious welcome as businesses await details

BEIJING – Senior officials from the Communist Party of China (CPC) on July 19 sought to give further assurances of Beijing’s commitment to reform, a day after a party conclave set out the blueprint for the country’s economy in the next five years.

But businesses and analysts remain cautious on whether optimism is warranted just yet, even as the officials pledged at a press conference in Beijing to do more, from an “orderly” expansion of markets, covering services to commodities, to a more equitable environment for foreign businesses.

The third plenary session of the CPC’s current Central Committee, or the Third Plenum, was highly anticipated for

China’s plans to grow a sluggish economy,

including how existing hurdles – from government debt to a housing slump to dwindling foreign investment – would be tackled.

The four-day meeting that involved some 360 party officials concluded on July 18 with a communique that said China will “basically realise socialist modernisation” by 2035 – implying Beijing still sees decent economic growth as crucial in the next decade.

Among other things, the country will foster “new quality productive forces” – the party leadership’s latest slogan for its economic strategy of science and technology innovation and industrial upgrading.

The European Union Chamber of Commerce in China said it is “positive” that China’s leadership has again acknowledged the headwinds facing the country’s economy and signalled intent to deepen reforms “to create a fairer and more dynamic market environment”.

But the chamber added a caveat that the communique did not offer enough details on whether there will be meaningful policy changes.

The communique said China will prevent and defuse risks in “real estate, local government debt and small and medium financial institutions”.

Observers are waiting eagerly for the reform document that was adopted at the end of the meeting, and which is expected to be released in the coming days.

Chinese economy expert Zhu Tian told The Straits Times that the document should offer more details about reform initiatives, of which there will be more than 300, said party officials at the press conference.

The third plenum in 2013 probably raised too high an expectation of ambition that was hard to fulfil, said Professor Zhu, who is from the China Europe International Business School in Shanghai.

The November 2013 meeting had vowed to let markets play a “decisive” role in allocating resources in the economy, signalling reforms to further liberalise the economy. The reform agenda was viewed as ambitious, but implementation has been patchy.

This time, however, the July 18 communique took a more calibrated view, saying that the role of the market must be “better (leveraged)”, while “a fairer and more dynamic market environment” will be fostered.

“Now that the domestic and geopolitical conditions have changed drastically, reaffirming market reforms and the support for the private sector should boost business confidence. I hope and believe that there will be some systematic reforms towards a more business-friendly environment,” Prof Zhu said.

Speaking to local and international reporters on July 19, senior party officials provided a preview of what some of these reform measures might be.

Some measures will streamline the country’s talent pipeline, reform the state sector, and create an environment for the private sector such that these sectors support the national priority of science and technology development.

The plenum’s document sets out “important plans” for “deepening the reform of the education, science and technology talent system”, said Education Minister Huai Jinpeng.

These include stepping up efforts to build a “national strategic talent force”, from scientists to innovators to engineers, and establishing a mechanism in which national strategic needs and the latest scientific developments would guide academic disciplines.

Mr Han Wenxiu, executive deputy director of the office of the Central Committee for Financial and Economic Affairs, said China will deepen the reform of state-owned enterprises and improve their competitiveness, with the target of having them be a source of original technology.

At the same time, he sought to reassure the private sector – hit hard by regulatory crackdowns in recent years, but an important growth driver – of its continued salience to China’s economy.

“We must create a favourable environment for the development of the non-public sector of the economy and provide more opportunities,” said Mr Han.

These measures include supporting “capable private enterprises” to take the lead in “major national technological research tasks”, introducing a law on promotion of the private economy, and “standardising administrative inspections involving private enterprises”.

Mr Han did not elaborate on the last item, but a series of raids on foreign consulting and due diligence firms in 2023 on national security grounds had damaged business confidence and raised questions about the opacity of such investigations.

Legislation such as a revised anti-espionage law in August 2023 had also increased uncertainties and the risks of doing business in China, in the eyes of business groups, especially those from the United States.

Foreign direct investment into China fell in 2023 to a three-decade low and continued to record year-on-year declines in the first five months of 2024.

These declines are a “temporary phenomenon”, said Mr Han, who reiterated China’s commitment to fostering a fairer and more open environment for foreign businesses.

China would “support the development of domestic and foreign-funded enterprises equally”, and ensure that foreign businesses get the same treatment in areas such as access, permits and procurements, he said.

It would also further relax access to its market for foreign firms, Mr Han said, and make it more convenient for business travellers and tourists to move around in the country.

While the narrative surrounding the plenum has dwelt mainly on economic issues, economists Larry Hu and Zhang Yuxiao of the Macquarie financial services group pointed out that it is ultimately a political meeting focusing on issues such as ideology and governance, not a policy meeting tackling specific economic problems.

And while the upcoming document might shed more light on the leadership’s plans for fiscal reform, these might take years to implement and are unlikely to impact the economy in the near term, they wrote in a July 18 note.

Noting how a key part of the plenum was the exposition of the concept of “Chinese modernisation”, they said: “A signature ideology is extremely important to the party, but it’s not something the market can trade on.”