China's Third Plenum Vagueness Misses The Moment

Here, many will argue that the rise of the Global South mutes the collateral damage from new tariffs from Washington and Brussels. And, to some extent, that's true. But with the globe careening toward“a trade war on all fronts,” as Gavekal Dragonomics analyst Yanmei Xie puts it, much of the Global South would sustain big blows, too.

Xi can't control who wins the US election
on November 5.
But whether it's Joe Biden dictating trade policies or a Donald Trump 2.0 White House, 2025 is already littered with potential economic landmines. All the more reason for Xi and Li Qiang to act boldly now to fix China's underlying cracks and raise its innovative game.

It's not like the economic backdrop is likely to improve appreciably six months on. There's little doubt, Xie adds, that a“new spirit of mercantilism is abroad in the US, with Donald Trump's Republican Party proposing a 'baseline tariff' on all goods imports, as well as targeted higher tariffs on imports from China, should it capture the White House.”

Trump's pick for vice president, US Senator JD Vance, said this week that“together we will protect the wages of
American workers
and stop the Chinese Communist Party from building their middle class on the backs of American citizens.”

Vance is a staunch supporter of revoking China's“most favored nation” trade status. Trump, meanwhile, warns in recent interviews that he would weaken the US dollar in a second term that might begin in January 2025. Vance, too.

As Trump tells Bloomberg:“I think manufacturing is a big deal, and everybody that runs for office says you'll never manufacture again. We have currency problems, as you know. Currency. When I was president, I fought very strongly and hard with President Xi and with [Japanese leader] Shinzo Abe.
So we have a big currency problem because the depth of the currency now in terms of strong dollar/weak yen, weak yuan, is massive.”

How a
Trump-Vance team
might proceed is an open question. The“Project 2025” scheme Republicans are mulling includes abolishing the Federal Reserve. That, in theory, could allow Trump's White House to set US interest rates. Or might Trump try to engineer a new“Plaza Accord” pressuring Beijing and Tokyo to accept stronger exchange rates?

Trump, remember, has talked openly about defaulting on US public debt as a negotiating tactic. Or canceling some of the debt China holds as a retaliation tactic. At present, Beijing holds about US$770 billion of US Treasury securities.

The mere whiff of such policies being considered might prompt Moody's Investors Service to revoke Washington's last AAA credit rating. That, at a moment when the US national debt is hitting US$35 trillion, could shoulder-check trade-reliant economies through the Global South.

All the more reason for Xi and Li to roll up their sleeves now. Not just to batten down the hatches but to put real meat on the bones of reform pledges past and present.

If Xi had hoped to signal a pivot from his current vision of state-led development and ally concerns among Chinese and foreign investors, it's not clear the week's proceeding did it. Many can't help but sense the Third Plenum outline looks much like the present course.

“Investment-led growth has peaked in China, as the
financial system
can no longer generate the same pace of credit expansion as in the past decade,” says
Logan
Wright, director of China
markets
research at Rhodium Group.“With this source of growth drying up, household consumption growth will be the single most important determinant of China's long-term economic trajectory and growth rate.”

Wright
adds that household consumption is constrained in China by low levels of household income and a highly unequal distribution of income.

“Fiscal transfers from the state to lower-income households would catalyze additional spending, as would a more progressive distribution of income,” he says.“Reducing savings rates alone is unlikely to boost overall spending significantly, given the low levels of savings among lower-income households.”

Later this month, after the Politburo confab, Xi's inner circle would be wise to offer specific policy shifts and timelines for implementation.

After all, expectations coming into this week were rather high. It's the first Third Plenum of the party's 20th Central Committee since 2013. Xi delayed the last one, which would've convened five years ago.

The event comes as China grew just 4.7% year on year in the first quarter. And as Beijing grapples with its worst deflationary run since 1999, a year-long property slump deepens, the population shrinks and investors worry that Xi may be more concerned with top-down control than cultivating new economic energy from the ground up.

As the week began, a flurry of news leaks in state media set the stage for disruptive moves to grow the private sector, expand local authorities' income via tax changes, liberalize the“hukou” system for local registration and increase mainland competitiveness in the artificial intelligence space.

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A series of bigger-picture questions remain unclear: the status of more assertive efforts to get bad assets off property developers' balance sheets to avoid defaults; building more vibrant capital markets; creating social safety nets to prod households to save less and spend more; and the fate of internet platforms uncertain about the regulatory outlook.

Investors are plenty used to opacity from top party officials. What's needed, though, is policy clarity - and
the sooner the better.

This week, party magazine Qiushi quoted Xi as stressing that“advancing Chinese modernization requires staying independent and maintaining self-reliance. We must develop our country and our nation with our own strength and maintain a firm grasp on the future of China's development and progress.”

Words with which few could quibble. But also phrases devoid of the
how, when, where
questions that continue to surround the
Xiconomics
era now into its 14th year.

“In 2013 expectations were very high for that Third Plenum, the communique came out and was disappointing, then a few days later the full resolution was released, and people got excited that there was a lot more substance to the reform plans, ”
says longtime China watcher Bill Bishop, who writes the Sinocism newsletter.“I do not know if a similar dynamic will play out this time.”

But, Bishop adds,“those still hoping for any change of course will likely be disappointed. The communique details the progress in comprehensively deepening reform since the 2013 Third Plenum and again makes it clear the leadership thinks they are on the correct path.”

Evans-Pritchard of Capital Economics notes that“there still appears to be a tension between policies aimed at [boosting] economic security and expanding the supply-side of the economy, and those aimed at giving market forces a greater role and rebalancing growth toward consumption.”

Wherever things lie, policy-wise, Xi's inner circle would be wise to match the barrage of slogans emanating from Beijing with details and timelines. The sooner the better.

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