The Chinese Communist Party’s (CCP’s) top officials are set to meet for the Third Plenum from July 15 to July 18, paving the way for potentially significant economic deliberations.
Yet, while the gathering is important for formulating China’s economic strategy, analysts’ expectations remain tempered despite official readouts, opinions, and editorials published by state media in recent weeks that suggest Chinese leader Xi Jinping’s long-term objectives will be reinforced.
Last week, the CCP’s 24-member Politburo, led by Xi, even dropped a major indication on the forthcoming plenum’s agenda, stating that a “resolution on comprehensively deepening reform and advancing Chinese modernization” will be presented for approval by the Party elite.
Nevertheless, the market’s grim outlook is visible in many experts’ opinions, many of whom maintain that no dramatic policy pivot, which has frequently been observed in the past, is what they are anticipating.
“Market expectations are low heading into the event, and so is the bar for an upside surprise,” analysts at Barclays FICC Research said in a note last week.
Since the major May policy announcement, China has seemingly exhausted its options on the property front, leaving little room for positive surprises in this sector, the British multinational bank says. Simultaneously, a broad focus on supply-side reforms, such as tech innovation and supply-chain self-reliance, is expected to be perceived as more of the same, thus being a non-event for markets.
Besides, market-moving actions would require a focus on demand-side stimulus or support, yet it would be “a low probability event,” the note said.
In May, following a nearly 10 percent decline in housing prices since the beginning of the year, Beijing unveiled a slew of new measures to revitalize its struggling property sector. Among the initiatives, the central bank lowered the minimum down payment for mortgages and eliminated the floor on interest rates for first and second homes.
Still, given that the plenum comes amid China’s ongoing property crisis and significant trade and tariff tensions with the West, experts say there may be insightful signals about how Xi’s innovation-driven economic philosophy will shape the regime’s decision-making.
‘Post-Property Era’ Focus
According to Goldman Sachs, the reform focus at the plenum is likely to be on containing risks in the “post-property era,” where the property sector is no longer a major growth driver and government finance is less reliant on property-related revenue. It thinks reforms will be in the direction of containing the potential for extreme negative outcomes, while trying to grow the possibility of extreme positive outcomes.Experts said that given the deep and prolonged housing correction, the Third Plenum might propose developing a new model for China’s housing market, emphasizing market enhancement and creating an affordable housing supply system. In the near term, Beijing could prioritize implementing policies for state-led inventory destocking before introducing additional funding, and new measures to reduce inventory levels, according to Barclays.
Regarding the issue of containing the risks of extreme negative outcomes, Goldman Sachs expects more signals on central government borrowing, local government debt resolution, and future tax system reforms.
“On containing left-tail risks [negative risks], we believe the key is to manage fiscal, financial, and economic risks stemming from the property downturn and local government implicit debt deleveraging,” Goldman Sachs said in a note.
Foreign Investments
With foreign direct investment declining and ongoing trends to move manufacturing out of China in favor of near-shoring or friend-shoring, Barclays also anticipates the Third Plenum to advocate for increased efforts to attract foreign investment. Beijing might consider lifting market access restrictions in sectors such as telecommunications and health care.Risks
Past Third Plenums have significantly influenced China’s economic trajectory. Notably, in 1978, Deng Xiaoping introduced the “reform and opening up” policy at this meeting, which spurred the country’s rapid economic growth.While most experts aren’t anticipating major shifts in economic policy at the upcoming session, some even see the forces that could weigh down the July session.
“We see risks as the property sector remains a concern. The downside risk is [also] in the speed of implementation. Geopolitically, the upcoming U.S. election is likely to be the key touchpoint, while trade disputes may involve more economies than the U.S.,” HSBC analyst Frederic Neumann wrote in a note this month.
Rather than a “big bang” policy initiative, analysts expect a continuation or even a scale-up of existing reform measures over a multi-year horizon.
These measures may include fiscal and financial reforms to contain systemic financial risks and prevent negative spillovers from the prolonged property downturn, as well as continued support for emerging industries and urbanization to boost China’s long-term growth.
Regardless of the policies announced, it will likely take several months to determine whether the pledges made at the plenum will have substantial effects.
Goldman Sachs concluded, “Due to the long-term nature of the Third Plenum agenda, we think it will take time for policy specifics to be formulated and the reforms announced to be implemented.”
