JING ZHANG AND CHRISTOPH NEDOPIL |
Much has been already written about the Third Plenum (or the Third Plenary) of China’s 20th Central Committee. International media portrayed a picture of “investor disappointment”, “keeping the status quo” while China’s media praised the “reform resolution”. At the same time, many writers took merely the short “Meeting Communique” published on July 19, just after the meeting to evaluate the Third Plenum’s outcomes, rather than the full list of decisions, called “Decisions of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernisation” (Decisions).
In our view, this meeting carries great significance for China’s next steps of development. In a published and translated speech, China’s state news agency Xinhua published a detailed explanation of the process and decisions penned by China’s President Xi himself – which in itself is – in our opinion – highly unusual and showcases the greatest importance of this meeting.
Here are the key take-aways :
- The Session carries historical significance for observing how China and President Xi will tackle internal economic slowdowns and external geopolitical tensions.
- The Session sets ambitious timelines yet lacks specific measures: reform by 2029, a socialist market economy by 2035, and a modern socialist country by mid-century.
- The Session emphasises a comprehensive approach to green and low-carbon development.
- The Session affirmed that the socialist market economy and its ongoing reforms remain central to China’s economic modernisation, emphasising the need to balance market freedom with regulation.
- The Session emphasised scientific research and technological upgrades in China’s industrial sector.
- The Session highlighted a strategic overhaul of finance, fiscal and taxation as a central reform priority.
- The Decisions pledge measures to invigorate the sluggish property sector by granting municipal governments enhanced decision-making powers and allowing certain cities to adjust or eliminate housing purchase restrictions as needed.
- The Decisions entails measures to improve local government finances by reviewing tax allocations to increase local government revenue and raising the central government’s expenditure share to reduce local spending pressures.
- The Session outlines a growing role for state-owned enterprises and support for private enterprises.
- The Session sends a non-negative signal to foreign cooperation in investment, science cooperation and business, but little encouragement.
- National security concerns are increasingly shaping policymaking, and the Session emphasises the coexistence of “development” and “security” in addressing severe and complex internal and external challenges.
What is China’s Third Plenary Session?
The People’s Republic of China is led by the Communist Party of China (CPC). The highest governing body within the Party is the National Congress, which convenes every five years and elects the Central Committee. The Central Committee serves a five-year term, implementing the resolutions of the National Congress, leading the Party’s work, and representing the CPC externally during the interims.
Throughout its five-year term, the Central Committee holds traditionally seven plenary sessions to address and decide on critical issues, referred to as the First through Seventh Plenary Sessions:
- First Plenary Session: usually held immediately after the National Congress, it is responsible for electing the new central leadership.
- Second Plenary Session: conducted before the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), it recommends leadership candidates for the NPC, CPPCC, and state institutions.
- Third Plenary Session: typically held a year after the new leadership assumes power, this session sets the long-term agenda focusing on major economic reforms and development decisions. Notable examples include Deng Xiaoping’s 1978 economic reforms, Jiang Zemin’s 1993 transition to a socialist market economy, Xi Jinping’s 2013 market-oriented reforms, and the 2018 focus on party personnel and state institution restructuring to support further economic development.
- Fourth Plenary Session: typically held a year after the Third Plenum, it aims to implement and deepen the decisions and arrangements made in the Third Plenum.
- Fifth Plenary Session: Primarily concerned with the formulation of the Five-Year Plan, outlining national economic and social development goals.
- Sixth Plenary Session: Addresses significant arrangements for party building, addressing internal governance, discipline, and ideological education within the Communist Party of China.
- Seventh Plenary Session: typically held shortly before the next National Congress, this session prepares documents and procedures for the upcoming Congress.
Why is it a key focus?
The 2024 Third Plenum is the third meeting of China’s 20th Central Committee since President Xi began his third term in October 2022. Initially expected to take place in October 2023, this session was delayed by over six months, sparking speculation about internal disagreements or pandemic-induced delays in reform.
Internally, China’s National Bureau of Statistics reported a 5% year-on-year GDP increase to 61.7 trillion yuan for the first half of 2024, on the same day of the Third Plenary Session. However, the quarterly growth rate dropped from 5.3% in Q1 to 4.7% in Q2, below expectations. Plus, key issues include a persistent real estate crisis, high youth unemployment, declining corporate and consumer confidence, and escalating local government debt, highlighting the complexities facing China’s economic management and reform efforts.
Externally, China is navigating a turbulent international environment characterised by strained US-China relations due to trade disputes, technology sanctions, and heightened support for Taiwan, which China views as a sovereignty threat. Concurrently, China and Russia have deepened their strategic partnership to counterbalance Western influence. The South China Sea remains a flashpoint of regional friction, exacerbated by US freedom-of-navigation operations. China’s Belt and Road Initiative extends its global influence through major infrastructure projects, raising concerns about debt dependency and strategic control. Relations with the EU are a mix of strong economic ties and tension over electric vehicle issues, yet both sides continue to collaborate on global challenges like climate change.
Therefore, this year’s third plenary carries historical significance due to the internal and external issues outlined above, making it a focal point for observing how China and President Xi will address these challenges.
What communiqué was delivered?
The “Meeting Communique” described the situation China faced as “severe and complex (严峻复杂)“, indicating a reform strategy increasingly shaped by external factors. This emphasises “security (安全)” in addressing risks, leading global governance, and shaping a favourable external environment (Figure 1).
The communiqué prioritises “institutionalisation (系统化)” emphasising system integration, adherence to systemic thinking, and systematic deployment, which means that as reforms advance, future policies aim to become increasingly systematic, consistent, coordinated, and comprehensive.
The communiqué sets an ambitious timeline, stating that by 2029 – marking the 80th anniversary of the People’s Republic of China – proposed reforms will be completed, and by 2035, a high-level socialist market economy will be established. While this reflects China’s commitment to reform and economic modernisation, it notably lacks specific measures to tackle the country’s current economic difficulties.
What were the key decisions?
The Decisions proposed 60 significant reform measures across 15 major areas, targeting system, mechanism, and institutional levels. While the document covers various aspects of China’s development, our policy brief specifically concentrates on the green and macro economy as well as China’s international collaboration.
Highlight 1: green economy including “high-quality development” key focus
The Decisions highlights the importance of green economic development and transition, stressing the need to “ramp up the green transition in all areas of economic and social development” and to “actively and prudently move toward reaching peak carbon emissions and carbon neutrality”. Specifically, the decisions highlight an expansion of “high-quality” products and “new quality productive forces”, targeting strategic sectors like information technology, artificial intelligence, aerospace, new energy, new materials, high-end equipment, biomedicine, and quantum technology.
Central to this effort is the development of the new policy (e.g., in energy), expansion of state-capital and green finance, and the “education-research-talent” system, including measures to enhance research institutions’ and state-owned enterprises’ role in innovation.
The focus encompasses the following aspects:
Accelerate the development of a new energy system, including unified electricity market
China’s electricity system has undergone significant greening with the share of coal dropping to 53% (down from 60% a year ago) in May 2024. However, one major challenge for the further decarbonisation of the electricity system has been a lack of a unified electricity markets, with different provinces not trading electricity and a lack of broader market features (such as spot markets, future markets).
The Decisions vows to “accelerate the planning and development of a new type of energy system and improve the policies and measures for promoting the absorption of electricity generated from new energy sources into power grids and for the regulation of such energy”. This will support new solar and wind installations, enhance grid integration, and prioritise UHV investments. The Decisions also calls for power management reform, a unified electricity market, and optimised residential pricing. These reforms are expected to restore electricity’s commodity attributes, streamline pricing, and support flexible power systems.
Improve carbon emission measurement to control the total amount and intensity of carbon emissions
China’s carbon emission planning measures and focuses policy on carbon intensity (i.e., emissions per unit of GDP) rather than total emissions. This has significant negative consequences on reducing total emissions with impacts on a carbon market (i.e., what to trade if there is no limit on emission allowances) and climate.
The Decisions suggest moving to total emission amount measurement, which would be a significant deviation from current practices. However, similar suggestions had been made previously, e.g., in July 2023 by the Central Committee for Comprehensively Deepening Reform (CCCDR) which reviewed and passed the Opinions on Promoting Dual Control of Energy Consumption and Gradually Shifting to Dual Control of Carbon Emissions the Dual.
Optimising policies on green government procurement and refine the green taxation system
The Decisions calls for robust fiscal support to advance the green transition. Currently, government green procurement primarily focuses on supporting green building materials, with some regions promoting green packaging and prioritising green data centres. Future policies are expected to broaden these categories.
To strengthen the green tax system, which currently includes only resource tax and vehicle and vessel taxes, it is essential to broaden the scope of environmental protection taxes and adjust pollutant tax rates. Additionally, expanding the consumption tax base to cover more high-energy-consuming and high-pollution products would also be considered in future policies.
Improve incentive mechanisms for green consumption
The Decisions seeks to boost green demand and foster the healthy growth of green and low-carbon industries by “developing these industries and enhancing incentives for green consumption.” Promoting green consumption can alleviate oversupply in green and low-carbon industries. For example, extending the 2023 tax exemption for new energy vehicles will boost demand, drive technological advancements, and support industry growth.
Actively adapt to digitalisation and greening trends in trade
The Decisions aims to “step up reforms to integrate domestic and foreign trade, and actively respond to the trends of digital and green trade”, leveraging China’s green product advantages globally. It supports the green development of the BRI, facilitating the green transition of developing countries and advancing a “development and governance” approach. The Decisions also proposes establishing a carbon emission accounting system, product carbon labelling certification, and carbon footprint management system. Aligning with international standards and promoting mutual recognition of carbon footprints can help address green trade barriers from developed economies.
Highlight 2: low priority for natural protection
The Decisions outlines an overarching goal of deepening reform by emphasising the need to “build a beautiful China” and enhance the ecological environment governance system. However, the topic of ecological conservation comes late (point XII) in the Decisions and barely fills two pages with vague notions of promote ecological protection as a priority and highlighting that “Chinese-style modernisation” involves achieving harmonious coexistence between humanity and nature.
Highlight 3: possible big fiscal and taxation reforms elevating the role of provinces in raising taxes
The Third Plenary Session highlighted a strategic overhaul of finance, fiscal policy, and taxation as a central reform priority, not least to “defuse hidden debt risks”, such as in the provinces: Guangdong, Shandong, Jiangsu, Zhejiang and Sichuan. China’s local governments face around 40 trillion yuan ($5.5 trillion) in debt at the end of 2023, worsened by falling land sale revenues and a property market downturn.
The Decisions promises to local governments that the power to collect taxes will be steadily passed to local governments, and that local governments shall have the authority to set the rate for various taxes (e.g., construction tax, urban maintenance tax) and expand the scope for use for funds raised from the sale of local government special purpose bonds (a way for local governments to raise their own revenues rather than having to rely on tax distributions from central governments). At the same time, the Decisions emphasises that “the central government will hold more fiscal powers (…) and raise the proportion of central government expenditure accordingly.”
Among the proposed solutions, evenly splitting the consumption tax between central and local governments could increase local revenue by around eight hundred billion yuan annually, offsetting much of the decline in land transfer revenue and significantly stabilising local finances.
Meanwhile, the Third Plenary responds to the struggling property sector, a significant concern for the Chinese economy. Key measures include empowering municipal governments with greater authority to regulate the real estate market. Additionally, the Decisions permits select cities to ease or remove restrictions on housing purchases, tailored to local conditions. They aim to stimulate activity in the sluggish property market and address ongoing economic challenges.
This approach seeks to optimise the tax structure while maintaining a stable macro tax burden. The reform aims to both “reduce” and “increase”. This “reduce” and “increase” idea seems also to prevail in the promise to reduce taxes to support key industries and increasing local fiscal revenue through an improved direct tax system.
Highlight 4: SOEs bear greater responsibility with “encouragement” for the private sector
The Decisions outlines distinct roles and requirements for state-owned and private enterprises. SOEs are tasked with focusing on “national security and critical sectors” and “strategic emerging industries”, aiming to become “stronger, better, and bigger” while “enhancing core functions and competitiveness”. Key reforms will include promoting independent operation of natural monopoly businesses in sectors such as energy, railway, telecommunications, water conservancy, and public utilities, and advancing market-oriented reforms in the competitive areas of these sectors and improve regulatory institutions and mechanisms. SOEs are also to “pursue original innovation” and work in “forward-looking, and strategic emerging industries”.
In contrast, policies for private enterprises emphasise “encouragement and support”, aiming to optimise the business environment and restore confidence by removing market access barriers, support capable private enterprises to take the lead in undertaking major national technological research tasks, and improving financing policies. The Third Plenary Session also endorsed the creation of legislation to promote the private economy, which had already been introduced into the lawmaking process by the country’s top legislature in February 2024.
Highlight 5: promote high-level opening up
The policy stance on openness remains consistent, with an emphasis on “promoting reform through opening up.” This iteration of the policy focuses more on advancing the reform of systems and institutions, including:
- actively aligning with international high-standard economic and trade regulations. This involves steadily expanding institutional opening up and developing a more advanced open economy system. key issues may include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Digital Economy Partnership Agreement (DEPA). Specific areas of focus will encompass property rights protection, industrial subsidies, environmental standards, labour protection, government procurement, e-commerce, and financial sector.
- expand unilateral openness towards the least developed countries and broaden opening up. This includes gradually expanding access to commodity, service, capital, and labour markets.
- reform the management systems for inward and outward investment. This include expanding the catalogue of encouraged industries for foreign investment; appropriately shortening the negative list for foreign investment; removing all market access restrictions in the manufacturing sector; collaboratively advancing the BRI with coordinating major landmark projects with ‘small but beautiful’ initiatives; enhancing convenience for overseas personnel through improved systems for residence, medical care, and payments.
Highlight 6: national security and risk management are embedded in all aspect of development
The Decisions highlights “promoting the modernisation of the national security system and capabilities” as a distinct component among the 15 sections of the text. In President Xi’s explanation of the Decisions, he emphasised that “the Decisions elevates the prominence of safeguarding national security.”
The Decisions incorporates security considerations across all facets of development and reform. This includes data security, industrial and supply chain security, technological security, financial security, urban security, and ecological security. Additionally, there is an emphasis on consolidating state-owned capital in critical industries and key areas related to national security and the core sectors of the national economy.
Maintaining the risk “bottom line” is an important aspect of security protection, focusing on fiscal, financial, and capital market risks. Requirements include strengthening government debt management, addressing and mitigating hidden debt risks, enacting financial regulations, implementing robust early risk correction mechanisms, and preventing systemic risks. Additionally, there is a focus on risk prevention, enhancing supervision, and fostering the stable and healthy development of the capital market.
Concluding remark
The Third Plenary Session of China’s 20th Central Committee outlines ambitious reforms amid economic and geopolitical challenges. The focus on green development, fiscal and taxation restructuring, and state-owned enterprises signals a strategic shift. As China navigates these transformative changes, the domestic stakeholders should stay attuned to how these resolutions might reshape the economy, while the global community watches for broader implications on international economic dynamics and geopolitical stability. Successfully achieving these reforms within the next five years will be a considerable challenge, demanding close observation and strategic adaptation.
Dr Jing Zhang is a Griffith Asia Institute Research Fellow and Professor Christoph Nedopil is the Director of the Griffith Asia Institute.
