China needs to provide a “clear direction and anchor” during the upcoming Third Plenary Session to revive market confidence, while market mechanism and structural reforms are also needed, a senior economics professor said ahead of a major conference this month.
We hope that [upcoming third plenum] “The document will address some issues… perhaps strengthening property rights surrounding entrepreneurship and putting local government finances on a more solid footing,” Alfred Schipke, director of the East Asia Institute at the National University of Singapore, told The Washington Post in Beijing last week.
“Some of it may be related to governance and sending a message to the global community that China, despite all its challenges, is open for business.”
Shipki has spent more than seven years as the IMF’s first resident representative in China since 2013 — the year Beijing pledged to let the market play a decisive role in allocating resources in a landmark reform document.
Before moving to India and then Singapore, Shipki had been promoting the IMF’s advice to promote structural reform in China, rather than accumulating debt.
Households, businesses and local governments are also looking for a clear direction and anchor, which will boost confidence.
China’s Politburo – a key decision-making body in Chinese politics – said last week that the country aims to build a high-level socialist market economy by 2035, while a decision on deepening reform will be published at the plenum.
There are “much more challenges” for policymakers in Beijing than in 2013, but China has a huge domestic market to draw on, and new industries are growing to fill the void left by the collapse of the property sector, Shipki said.
“Households, businesses and local governments are looking for a clear direction and anchor, which in turn will boost confidence,” he said, referring to weak consumption.
China has about 400 million middle-income people — more than the entire population of the United States — but many households are cutting back on spending and increasing precautionary savings.
Chinese household bank deposits remained high, rising by 16.67 trillion yuan ($2.3 trillion) in 2023 and 7.13 trillion yuan in the first five months of this year, central bank data showed.
But despite the many challenges on the ground, Shipki pointed to China’s successful use of its industrial policies in the electric vehicle sector, and suggested that technology transfer to the West could be driven by China’s rapid progress.
“Industrial policy does not always lead to success,” he said, citing previous attempts to produce competitive combustion engines.
“[However,] China had the resources, and it invested in electric cars early. On the other hand, it was also lucky, as it was not clear at the time whether electric cars would succeed.
“This also represents a slight change in mindset because, historically, technology transfer has had to come from the West.”
On the domestic front, Shipki said Beijing needs to make necessary structural reforms, focusing on boosting demand rather than supply-side improvements, where the central government should play a bigger role.
Although Beijing is working to improve policy coordination, Shipki warned of conflicts between government targets, including a 5% annual GDP growth target versus a 3% fiscal deficit-to-GDP target.
China has the potential to continue growing at a relatively high rate, but it must be sustainable.
“Whenever the economy slows down, the pressure is always on. [People’s Bank of China] “To provide support,” he said.
“It will be important for fiscal policy to play a more proactive role.”
“China clearly has the potential to continue growing at a relatively high rate, but it has to be sustainable. It has to be increasingly productivity-driven,” Schipke added.
Productivity, he added, could come from new technologies, new business investment, as well as a market mechanism that allows firms to fail.
“Right now, there is still a risk that a lot of resources will be misallocated,” Shepke said.