Experts Uncertain Whether China’s Third Plenum Will Reboot Economic Growth

On June 21, 2023, the Shanghai Composite Index fell below the key psychological level of 3,200 points, closing at 3,197.9, essentially returning to its early 2023 state. The image depicts an illustration of the stock market. (Mandy Cheng/AFP Photo)

Commentary

The Shanghai stock market has once again dipped below the critical 3,000-point mark. Despite exhaustive efforts by the Chinese Communist Party (CCP), the market shows no signs of recovery and faces mounting downward pressure. Experts warn this could mark the severest period for China’s economy since the 1990s, with potential stagnation or recession on the horizon.

Concurrently, the yuan has weakened, dropping to 7.27 against the U.S. dollar as of July 8, nearing recent historic lows. Recent economic indicators from the Chinese regime reveal a consistent deterioration since the second quarter, with fiscal revenues declining and a looming debt crisis.

Investment and Currency Decline Ahead of the Third Plenum

China’s Ministry of Commerce recently reported a significant decline in foreign direct investment, amounting to approximately $56.81 billion from January to May, down 28.2 percent year-on-year. The ongoing year-over-year decrease in foreign capital usage in 2023 stands at 8 percent, indicating an accelerated withdrawal of foreign investments.

On NTD’s “Pinnacle View” program, independent TV producer Li Jun said, “Since assuming office in February, China Securities Regulatory Commission (CSRC) Chairman Wu Qing has deployed various measures to buoy the stock market for over three months. However, these efforts appear to be waning, exacerbated by declines in leading sectors like liquor and automotive industries, prompting small shareholders and foreign investors to liquidate their holdings. This intensified pressure on the government to stabilize the market, with expectations that Mr. Wu would exert all efforts to maintain stability until the CCP’s Third Plenum.”

There has been a significant drop in the yuan over the past fortnight, reaching 7.267 against the U.S. dollar on June 26, marking a yearly low. The offshore yuan also slipped below 7.3, hitting its lowest point since November last year. This exchange rate decline is notably marked by the central bank continually lowering the middle exchange rate price, too. Some speculate these declines are the Chinese regime’s strategic response to counteract the strengthening of the U.S. dollar, given its tightly controlled exchange rate policies, which may otherwise have seen the renminbi plummet further.

Stock Market

Mr. Li noted that from June 21 up until July 8, the SSE Composite Index—the stock market index of all stocks traded on the Shanghai Stock Exchange—remained below 3,000 points, failing to recover. The battle to sustain this threshold, ongoing since 2008, has now been lost once more. In contrast, Taiwan’s stock market surged from 8,000 points in 2008 to over 22,000 points presently, nearly tripling in value.

Cai Shenkun, a senior Chinese media figure based in the U.S., said that “the Chinese stock market operates differently from Western market economies. It originated primarily to generate profits and resolve funding shortages for state-owned enterprises. Some listed private enterprises are not simply private but have close ties to state entities, effectively acting as proxies. Such companies may secure listings only with governmental support.”

Yi Huiman, the former chairman of the CSRC, was removed by the CCP after public anger grew over the Chinese stock market crash. According to Mr. Cai, Mr. Yi’s tenure was marred by questionable listing approvals for Zhejiang-based firms, many of which lacked genuine operational success. This opaque practice left retail investors facing substantial losses while benefiting officials and well-connected individuals.

Mr. Cai added that “there were systemic flaws in which major shareholders quickly sold off stocks upon price increases, reflecting low confidence in sustained growth and operational transparency, unlike practices observed in Western markets. Some companies are often beautifully packaged for listing but lack real revenue sources, causing stocks to plummet after purchase.”

Tensions Escalate Between Local and Central Authorities

Mr. Cai also said official economic data appears to have an optimistic facade, contrasting Premier Li Qiang’s assertion of a projected 5 percent GDP growth for this year at the Summer Davos Forum on June 25. Mr. Cai said that actual economic indicators, including export figures and tax revenues from January to May, paint a starkly different picture, suggesting that achieving a 5 percent growth target is unrealistic and improbable.

“Recently, I noticed a significant $230 billion discrepancy between last year’s customs export data and the figures reported by the State Administration of Foreign Exchange, hinting at potential data manipulation. It’s possible that inflated export figures were presented by customs to portray an overly positive economic outlook,” he said.

He added that the Chinese regime’s strategy to bolster the economy by exporting new energy vehicles, lithium batteries, and photovoltaics is being severely hampered by Western tariffs. “The May data indicates a sharp decline in electric vehicle exports, even before the full impact of new tariffs has taken hold, potentially foreshadowing bleaker future economic reports,” Mr. Cai added.

Illustrating the severity of the situation, Mr. Cai said that one Chinese county reported collecting only 12 million yuan in taxes from January to April, a drastic decrease compared to previous years when revenues reached 100-200 million yuan in just half a year. “This underscores the dire financial state of local governments nationwide, particularly outside the prosperous coastal industrial hubs, now teetering on the brink of collapse or paralysis. Dependent heavily on fiscal transfers from the central government, local governments struggle to maintain services as tax revenues dwindle while expenditures remain fixed,” said Mr. Cai.

To address this matter, the Chinese regime has resorted to issuing additional bonds, including long-term special bonds, to bridge fiscal gaps. However, these debts accrue interest that local authorities may struggle to repay.

As tensions between local and central authorities escalate over dwindling tax bases, the ability of local authorities to sustain operations without renegotiating revenue distributions is increasingly in doubt. Failure to address these issues could lead to widespread social unrest following the Third Plenum.

Distribution Issues

Guo Jun, editor-in-chief of The Epoch Times’ Hong Kong edition, said on “Pinnacle View” that “China’s fiscal and tax system is the root of its economic problems.” The Chinese regime’s proposed tax reform is flawed and might exacerbate the issues. The primary reason for weak domestic consumption is the lack of disposable income among the populace. Despite years of rapid economic growth, ordinary people have not proportionally benefitted, making the economy vulnerable to fluctuations.

Ms. Guo said, “China’s tax burden on its people is among the highest globally, and the revenues are not invested in basic public services but in government projects and party administrative expenses. The Third Plenum’s proposed changes only address the distribution between central and local authorities, not the fundamental disparity between the regime and the people. That’s the wrong direction.”

Ms. Guo said that the Chinese regime also aims to develop high-tech industries but faces systemic constraints. “Xi emphasized technology at the National Science Conference on June 24, but his approach to maintaining party control over innovation is counterproductive. Most high-tech advancements in China have come from private enterprises without party interference,” she added.

Ms. Guo believes that the CCP aims to launch high-tech products and promote exports under the so-called “new three key items” and new productive forces.

“Currently, China’s electric vehicle (EV) industry, a key part of its high-tech ambitions, faces intense competition and lagging research in foundational technologies like batteries. With deteriorating relations with the United States and Europe, collaboration in high-tech fields is challenging, limiting future development. The industry might have only three to five years of growth left before running out of steam, given the lack of breakthrough technologies necessary for long-term success,” Ms. Guo said.

“The future of EVs lies not in batteries or electric motors but in fully autonomous digital systems based on AI, for which the CCP has no significant advantage.”

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.