China’s delayed 2024 third plenum yielded a communique long on intentions and commitments but short on specifics. It listed ‘modernisation of the tax system’ without explicitly offering a fair fiscal balance between central and local authorities to solve the indebtedness of local governments. It offers no new policy proposals but, nevertheless, a new direction under Xi Jinping’s leadership is taking shape, one that is possibly as decisive as previous plenums.
The first third plenum under the leadership of Deng Xiaoping in 1978 marked a departure from Chairman Mao Zedong’s inward-looking development based on self-reliance. It opened China to the world economy, inviting technology, know-how and investment. This resulted in China lifting hundreds of millions out of poverty over the last 40 years and becoming the second-biggest economy in the world.
The 2013 third plenum was another important development and the first overseen by President Xi. Markets were given a ‘decisive role’, producing great expectations in western observers. This was boosted by Xi’s commitment to globalisation in 2017 at the World Economic Forum in Davos, contrasting the protectionist stance of US President Donald Trump.
At the time it was seen as the key indicator that China would make strides in opening up economically, especially when Xi stated that the private sector should be treated on the same footing as state-owned enterprises.
Since then, painful experiences with market functioning have led to a re-appraisal of the private sector and the role of markets. First, Xi’s commitments pronounced in 2013 damaged the confidence of China’s private sector. Second, the financial crises of 2015 led to a sweeping crackdown on fintechs, such as Ant Finance, but also private tutoring and video gaming, sending chills through the industries and sparking a multi-trillion-dollar market wipe-out. China’s real estate sector indebtedness is also a market failure but so far there has been no crackdown because of the ramifications for millions of ordinary Chinese people and the state-owned banking sector. All of them got to stay afloat.
Looking inward
However, the new phrase in the 2024 communique is ‘better leverage’ over the markets. They have to fit into the new priorities of ‘further deepening reform comprehensively to advance Chinese modernisation’. This is part of a new development philosophy achieving ‘high-quality economic development’ and ‘all round innovation’ based on science and technology.
The decisions of the third plenum summarising the new development philosophy are not new – they have been expressed by Xi on many occasions. This is the principle of pursuing progress while maintaining stability, ensuring both development and security, the dual circulation of domestic and international imperatives, advancing socialist democracy as consultative democracy based on the rule of law, ensuring people’s well-being by boosting common prosperity, national security and social stability, developing national defence and the armed forces, advancing work related to Hong Kong, Macao and Taiwan, protecting the environment and, finally, strengthening the governance and leadership of the Chinese Communist Party.
Given the current geopolitical environment and fragmentation of the global economy, these proposals go back to the old Chinese adage ‘zili gengsheng’, meaning: to rely on your own strength makes you even more resilient. This is much older than Communism and dates back to imperial times.
The bottom line is that, by reducing dependence on foreign technology, funding and know-how, China will mobilise its own resources and come out even stronger. Once it achieves this, the rest of the world will follow. We are already witnessing this as China has become the main trading partner of some 150 countries and is offering leadership in an increasingly fragmented world. A new world order with Chinese characteristics is shaping up.
Herbert Poenisch is Senior Fellow, Zhejiang University, and former Senior Economist, Bank for International Settlements.
