Commentary
China’s economy looked bleak in the third quarter, and the Third Plenum’s promotion of a state-controlled socialist market economy will not help it recover.
The Third Plenary Session of the Chinese Communist Party (CCP)’s Central Committee, which just ended last week, sets major policy directions and reforms, including economic strategies, social policies, and governance improvements. As China faces an economic downturn, the world anticipated a recovery plan from the Third Plenum. Instead, they heard a plan for increased socialism and “building a high-standard socialist market economy.”
China is currently facing an economic downturn marked by numerous troubling indicators. In the second quarter of 2024, China’s GDP growth slowed to 4.7 percent, falling short of the projected 5.1 percent and dropping from 5.3 percent in the first quarter. Youth unemployment, although declining, remains high at 13.2 percent. Industrial production increased by 5.3 percent year-on-year in June but fell from 5.6 percent in May and 6.7 percent in April.
China’s services activity growth is also slowing. The services purchasing managers’ index (PMI) suggests growth above the 50 threshold, but the trend is downward. The Caixin/S&P Global Services PMI hit an eight-month low of 51.2 in June, down from 54.0 in May. Foreign direct investment (FDI) has been falling steadily, with net FDI remaining negative for the past year. Property sales were down 27 percent from the start of the year through June, leading to a sharp decline in housing prices and a 10.1 percent decline in property investment.
The Third Plenum was expected to provide an economic remedy for an embattled economy. Instead, its communiqué urges, “We must acquire a deep understanding of the decisive significance of establishing Comrade Xi Jinping’s core position on the Party Central Committee and in the Party as a whole and the guiding role of Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era.”
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Xi’s tightening grip on markets has been evident since the beginning of his first term. However, in the Third Plenum communiqué, the phrase “decisive role” of markets has been removed. While CCP media claimed the plenum resulted in sweeping reforms, analysts see no significant plan for economic recovery. The Third Plenary Session reiterated the economic and social goals Xi has promoted since taking office: high-quality economic growth, technological self-reliance, environmental sustainability, balanced urban-rural development, and enhanced social stability and governance. He also emphasized addressing China’s worsening property crisis, which he has been unable to resolve.
The recent language indicates increased intervention by central authorities to correct market failures and “maintain order.” This underscores a fundamental issue with communism and socialism: the belief that a small panel of central planners can allocate resources and determine product types, quantities, and pricing more effectively than the market. This approach has repeatedly failed in communist countries. Markets are more efficient because they involve all consumers and sellers, the entire population. Daily transactions provide real-time information, leading to automatic adjustments in price, quantity, and resource allocation.
For example, if a shop introduces a new ice cream flavor that consumers dislike, it will stop selling it. If this trend is nationwide, manufacturers will halt production and reallocate resources like milk and sugar to more popular products. Central planners in Beijing cannot accurately predict which flavors will succeed or how much to produce.
This inefficiency is evident in state-owned enterprises, which often become bloated and ineffective without a profit motive. For instance, expensive private hospitals coexist with nearly free government hospitals because private ones are perceived to offer better care. The shift toward market-oriented policies in 1978 helped lift China out of absolute poverty, with much of the growth driven by the private sector. The CCP eventually embraced this sector, allowing entrepreneurs to join the Party.
Xi is reversing the trend of private-sector-led growth by reinforcing communist ideology and the public sector. Despite his goal of fostering a consumption-based economy, which relies on the private sector, the best Xi offered in the plenum was “boosting the role of the private sector alongside that of state-owned enterprises,“ according to a China Daily report. This suggests he is not prioritizing the private sector but intends to give ”more opportunities for the private sector to shine,” the report said. Therefore, private firms will still have to compete with state-owned enterprises and depend on the state’s generosity in providing opportunities rather than allowing the market to create them organically.
After the plenum, the People’s Bank of China adjusted the U.S. dollar-yuan reference rate to 7.135, down from 7.10 earlier in the year. The yuan is permitted to fluctuate plus or minus 2 percent from this reference rate. This move signals a weakening of the yuan and underscores the CCP’s continued insistence on controlling the economy and negating market forces. The value of the U.S. dollar, euro, and other freely exchangeable currencies is determined entirely by market forces. Still, the CCP wants the last say on its currency value.
The fact that the yuan’s value remains only partially market-driven, combined with the extreme capital controls the CCP maintains over the currency, hinders foreign investment and economic recovery. However, this is consistent with a “socialist market economy.”
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
