Can the Third Plenum Reinvigorate China’s Growth Model?

As reported by English-language state media, the agenda centres on “further comprehensively deepening reform and advancing Chinese modernization.”

This focus on reform comes at a critical time, following a weaker-than-expected GDP growth figure for the second quarter of 2024. The question on everyone’s mind, particularly for traders, is whether this meeting will act as a catalyst for change in China’s economic trajectory.

Let’s take a closer look.

China’s Q2 Growth Falls Short at 4.7%, Sparking Reform Hopes

China’s economic growth fell short of expectations in the second quarter of 2024, according to data released today by the National Bureau of Statistics of China. Here’s a breakdown of the key points and what they might mean:

• Slowdown Confirmed: Year-on-year GDP growth clocked in at 4.7%, marking the slowest pace since the first quarter of 2023. This falls below the 5.3% growth recorded in Q1 2024 and misses analyst expectations of 5.1%. On a quarter-to-quarter basis, growth came in at a sluggish 0.7%, from the previously revised downwards reported 1.5% for the first quarter.
• Chinese Consumption Takes a Hit: A significant factor in the slowdown is slumping consumer spending. Retail sales, a key indicator of consumer spending, rose by just 2.0% in June, significantly slower than the 3.7% growth seen in May. This further underscores the cautious spending behaviour of Chinese consumers. This retail sales weakness can be attributed to several factors:
  • Real estate downturn: China’s once-booming real estate sector, a major driver of economic activity, is now facing a crisis. Since 2024, the industry has witnessed the collapse of giants like Evergrande and Country Garden, alongside a broader market slump. Several factors are contributing to the downturn. Firstly, potential homebuyers are hesitant to buy new property due to job security concerns and uncertain future earnings, which weakened consumer confidence. Secondly, the financial woes of major developers have instilled caution in the market due to developers instability and bankruptcy. Finally, China’s ageing population naturally reduces demand for new housing, due to shifting demographics.
  • Lower stock market prices: The SSE Composite Index has stagnated since the beginning of 2024, following a hefty 18% decline over the past two years. Meanwhile, the FTSE China 200 has managed a modest gain of over 2.7% this year, but remains significantly lower after a 40% plunge over the last three years. This overall weakness in the stock market is likely eroding household wealth and dampening consumer confidence, potentially impacting spending habits.
  • Job security concerns: China’s economic engine is sputtering, with growth figures dipping in recent years. This slowdown translates directly into the job market, particularly for industries that once thrived on exports and manufacturing. As China reorients its focus towards services, some sectors are experiencing job losses. Adding to these woes is the relentless march of automation, which is steadily replacing human labour across various industries. Finally, China faces a demographic challenge with its rapidly ageing population. Fewer young people entering the workforce means a shrinking pool of labour, further unsettling the job market. These combined factors create a sense of unease among Chinese consumers. With job security less certain, many are tightening their spending and prioritising essentials, contributing to the overall economic slowdown.

The National Bureau of Statistics’ call to “invigorate the market and stimulate internal impetus” signals that policymakers are likely exploring solutions to address the factors hindering economic growth. This could involve stimulus packages aimed at bolstering consumer spending and investment. Additionally, measures to stabilise the property market and policies promoting job creation and consumer confidence might be on the table.

The bureau also emphasises the need to solidify and strengthen the current economic recovery for sustained and sound long-term growth. However, the effectiveness of these potential new upcoming measures hinges on their ability to tackle the root causes of the slowdown.

The Third Plenum meeting presents a critical opportunity for China’s leadership to demonstrate a clear strategy for navigating these economic challenges and reigniting the momentum of the nation’s growth story.

Chinese Third Plenum: China Seeks Reforms to Counter Economic Slowdown

China kicks off its highly anticipated policy meeting, the Third Plenum, today, July 15th, which runs through Thursday, July 18th. This gathering carries significant weight, as past Third Plenums have ushered in transformative periods for China’s economic policies.

CNBC reports that one of the most famous examples came in 1978, under the leadership of Deng Xiaoping. During a Third Plenum that year, China announced a bold move to kickstart economic reform by opening its doors to private and foreign capital.

Originally scheduled for last fall, China’s gathering of top Communist Party leaders is held only once every five years. This delay suggests the complexity of the issues facing China’s leadership, and perhaps a need for more time to forge consensus on solutions.

The agenda is likely to extend beyond the immediate crisis in the real estate sector. Key areas of discussion are expected to include:

• Managing Local Government Debt: High levels of debt at the local level pose a significant risk to China’s financial stability.
• Boosting Innovation: China aims to become a new leader in advanced manufacturing and technological innovation.
• Fiscal Reforms: Changes to China’s fiscal system could be on the agenda, aimed at ensuring long-term economic sustainability, as well as better control debt levels in the country.
• Structural Reforms: Broader structural policy adjustments may be explored to address underlying economic imbalances.

All eyes are on China’s leadership’s capacity to navigate a complex economic landscape. The details of proposed reforms and their subsequent implementation will be closely watched by analysts and traders, providing crucial insights into China’s ability to chart a new course for economic growth.

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