The Third Plenum of the Chinese Communist Party’s (CCP) 20th Party Congress concluded on July 18, 2024. Its communique laid out a number of reforms, but for the most part underwhelmed analysts and China watchers. There was no master plan to guide China’s economy in a new direction, especially broad measures to create a consumption-driven growth model over the next few years.
Yet, expectations in the West were unrealistic all along. The days of easy reforms, such as opening up to trade and investment, as well as allowing market forces to garner strength have long passed. And even these early reforms were gradual, using trial-and-error approaches, often focusing on nitty gritty issues, such as reforming state-owned enterprises. In fact, the overall reform push never fully embraced the neo-liberal mantra of unfettered markets and private enterprise.
This was also very much the misconception in late 2013 after the Third Plenum of the 18th Central Committee issued a broad policy framework. Many saw the framework as ushering in a new era when markets would reign and China would finally transition to the dominance of private enterprise. These expectations were further fanned when the World Bank and the Development Research Center under the Chinese State Council jointly issued the China 2030—Building a Modern, Prosperous and Harmonious Society report. It put “structural reforms to strengthen the foundations for a market-based economy” right up front.
However, many of the 2013 plenum’s reforms, ranging from the economy to land, environmental, and social-welfare policies never came to full fruition. As many commentators in the West have pointed out, China didn’t abandon a state-centric approach to economic development. Rather, it’s been quite the opposite. Under Xi Jinping, Beijing doubled down on state-guided methods and still remains fixated on the “means of production” rather than consumption.
But to focus solely on policy means misses the boat. China’s overall reform drive remains intact and forceful, more so than in many other economies of China’s level of wealth and innovation. Reform, per se, is part of the modern CCP’s creed, a sort of existential necessity for political survival in what is a country of enormous proportions.
In this context, Yale University scholar and Focus contributor Stephen Roach correctly points out that the overall reform drive has shifted, not abated. The focus on specific socio-economic reforms is less prominent, while reforming governance itself looms large.
An emphasis on improving the governance capacities of the Chinese state resonates deeply with Chinese history. Every single imperial dynasty was obsessed with how to govern the vast country, to find means to effectively impose its will upon the populace. Not only material and physical incentives, but the very shaping of culture and minds were employed.
So, it is no surprise that Xi is following this historical pattern. His signature anti-corruption campaign is most clearly tied to this approach. In fact, the enormous amount and depth of corruption uncovered in the various phases of the campaign, including recent efforts focused on the People’s Liberation Army (PLA), show how achieving good governance remains very much a work in progress for China’s leaders.
An overarching focus on improving governance thus appears as a logical means to achieve the reform goals outlined in the recently concluded Third Plenum. Many of these are aspirational, such as to “deepen reform” by focusing on “high-quality development” and “new productive forces.” Perhaps the single-minded stress on innovation in new technologies and advanced manufacturing stands out as the number one objective of the Plenum’s communique.
That China’s leadership is doubling down on industrial policies to achieve technological breakthroughs, and ultimately technological self-sufficiency, is understandable given intensifying geopolitical friction centered on technology. But it is questionable whether this bet on high-tech as a new driver of growth can compensate for the large downward draft created by the popping of China’s giant real estate bubble.
One thing is for sure, the methods used to achieve technological innovation on the scale imagined in the communique necessitates the use of both market and state forces. The aim is to “leverage the role of the market, foster a fairer and more dynamic market environment, and make resource allocation as efficient and productive as possible . . . while ensuring effective regulation.”
Similarly, the communique lays out the aim of ensuring “that economic entities under all forms of ownership have equal access to factors of production in accordance with the law, compete in the market on an equal footing, and are protected by the law as equals.” While it is clear that Xi’s CCP will not tolerate private sector dominance, the simple truth is that most technological development in China is occurring in private firms. The communique’s emphasis on fostering a healthy and competitive private sector should not be dismissed as empty hyperbole. It implies the continuation of a state-private sector symbiosis that has been quite successful.
Perhaps the biggest misconception about China’s reform drive over the past 45 years is the idea that the state gave up control in favor of market forces. This was never the case. State policy continuously sought to strike a balance, fostering market forces, even building actual market infrastructures, as with future markets tied to key resources such as oil, iron ore, etc. However, once market forces get out of hand, as in 2015, the heavy hand of the state rapidly appears, often ham-fisted and unyielding, but so far containing macro-economic risks.
Much in the Plenum has been left to the future for policy-makers to tease out. Serious and mounting problems, including the property crisis, local-government indebtedness, and lackluster consumer and investor confidence are acknowledged. But expectations that the Plenum would lead to a major policy reorientation, especially large fiscal and monetary stimuli as seen in the West, were always misplaced. The Third Plenum was about continuity, endorsing China’s current policy thrust rather than marking a decisive shift.
