Long-awaited Chinese policy update presents no major shift

BEIJING — China released a policy document on Sunday (July 21), outlining known ambitions, from developing advanced industries to improving the business environment, with analysts spotting no sign of imminent structural shifts in the world's second biggest economy.

The 60-point document's publication follows the closed-doors meeting of the Communist Party's Central Committee, led by President Xi Jinping, which takes place roughly every five years, and is known as a plenum.

It was held from July 15-18 as China verges on deflation and faces a prolonged property crisis, surging debt and weak consumer and business sentiment. Trade tensions are also flaring, as global leaders grow increasingly wary of China's export dominance.

These challenges have led some economists to urge Beijing to shift focus to boosting consumer demand and away from a debt-fuelled, investment-led model that funnels resources into manufacturing and infrastructure at the expense of households.

China's long-term growth potential is at stake, these economists say.

But the plenum reasserted China's quest for "new productive forces", a term Xi coined last year that envisions scientific research and technological upgrades of the country's sprawling industrial complex.

It set out to "promote revolutionary breakthroughs in technology, innovative allocation of production factors, and in-depth industrial transformation and upgrading," the policy document said.

It listed as strategic industries "new generation information technology, artificial intelligence, aviation and aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology".

"The overall industrial system is large but not strong, comprehensive but not refined, key and core technologies are controlled by others," state media quoted Xi as telling the plenum.

The plenum was initially expected late last year, but was postponed without explanation.

State-led innovation and growth

Gary Ng, Asia-Pacific senior economist at Natixis, said that the plenum painted a future of "state-led economic growth, innovation and security".

"An all-in bet on manufacturing and new productive forces may not be adequate as it is full of uncertainties," Ng said.

The document also reiterated that markets will play a decisive role in resource allocation, that the government will work on legislation to improve conditions for the private sector, and flagged fiscal and financial reforms.

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Other policy targets included boosting affordable housing, improving job opportunities for young people and the standard of living for the elderly.

Like most documents of this kind, it did not say how Chinese leaders intended to reach those goals, many of which would require policies that are contradictory in nature, as Party officials acknowledged on Friday.

Beijing has never explained, for instance, how to get consumers to spend more when resources flow primarily to producers and infrastructure, or how it plans to stimulate growth, while curbing debt.

At a plenum in 2013, Beijing launched a policy agenda that included most of the goals listed in Sunday's document, but also ambitions to liberalise financial markets and make domestic consumption a more prominent driver of growth.

A capital outflows scare in 2015 halted many of these plans.

Many analysts say national security considerations have pushed China in the opposite direction in recent years, tightening control over large parts of the economy and carrying out regulatory crackdowns on industries, including tech and finance.

Tax changes

One area where analysts expect to see new measures soon is local government finances, as policymakers look to ease concerns over municipal debt of more than US$13 trillion (S$17.47 trillion) that poses risks to financial institutions and economic growth.

In 2023, local governments' fiscal revenues accounted for 54 per cent of the nation's total, while their expenditure accounted for 86 per cent, data from the finance ministry showed.

The plenum flagged plans to address that imbalance.

It said local administrations would be allowed to gradually retain more of the consumption tax, which is currently fully transferred to the central government and accounts for almost a tenth of all revenues.

"It is the most urgent thing to expand the tax sources for local governments," said Zhaopeng Xing, senior China strategist at ANZ. "The current fiscal situation is definitely not good."

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