AHK Policy Deep Dive

The Third Plenary Session of the 20th of the Communist Party of China Central Committee was held in Beijing from July 15 to 18. Typically, economic reforms for the coming five to ten years are established at the Third Plenums of the Central Committee and are therefore of high importance. The documents released afterwards are meant to point out a long-term direction. That this Plenum took place later than usual could be a sign that this long-term direction might be highly controversial within the highest ranks.

This time, the high-level documents, the Communique and the Resolution on Deepening Reform, represent – even stronger than expected – a continuation and reinforcement of existing policy directions. Even though China’s (current) economic development seems to be a major point of discussion this time during the session (and hence a major concern of the leadership), the documents lack more immediate policy twists targeting the stimulation of the economy, especially on the demand-side. Rather, the policy directions and measures are much more a manifestation of the long-term structural priorities set before:

Technological Development Above All

As expected, technological and high-quality development take a prominent position in documents. This long-term direction has been strongly (re-)emphasized in the Two Sessions, and the Plenum clearly manifests this endeavor. The leadership continues its course towards industrial transformation and technological progress, which is seen as a means to fulfill several other key necessities, such as economic growth and national security. The major points are:

• Self-reliance in technology remains one of the key issues for critical industries, such as semiconductors, AI or biomedicine. Technology breakthroughs are still seen as urgently needed in the current international landscape.
• Another priority is to safeguard the stability of China’s supply chains and industrial chains through a “mechanism” for assessing and responding to risks. It is the first time that this “mechanism” is mentioned, albeit without any other specification. (This is another hint towards self-reliance in high-tech and sci-tech.)
• The “New Productive Forces” are expected to bring stronger impetus to economic growth. (This is basically a smarter and greener (re-)allocation of production factors.)
• Education in science and technology is seen as the major measure to achieve technological development. (Achieving Technological Development via cultivating talents was already remarkably emphasized in this year’s Two Sessions.)
• Supporting the transformation of scientific research results. (Progress on that end was seen as too little before.)
• Digital/intelligent transformation of the real economy is another focus.

What it means for Foreign Companies

Chinese technological pursuit and industrial transformation offers many opportunities for companies offering high-quality products and solutions. As Chinese competitors gradually increase their investment in R&D, however, the competitive pressure on foreign companies in the market will also increase in the high-end segments. Also, from a national security and self-reliance perspective, foreign companies might still have a hard time winning public tenders or securing their customer base.

Indirectly Boosting Consumption in the Long-Term

Given the current economic situation, there was the hope that the Plenum would push for stimulus measures for boosting consumption. However, this is remarkably absent from the documents, but some initiatives can be related:

• Only one sentence on consumption in the Resolution refers to a “refinement of the long-term mechanisms” for expanding consumption.
• Monetary policy: More interest rate cuts in the near term to be expected.
• Indirectly boosting consumption via stifling consumer confidence: The reform measures also target the improving people's livelihood, addressing income distribution and employment, as well as migrants’ access to public services.
• In the long-term: The first time it is acknowledged that China now is “Child-friendly society”, and direct subsidies and a gradual raise of related tax benefits can be expected.

What is means for Foreign Companies

If the Chinese government will be able to reinstall consumer confidence and boost consumption is a major concern of foreign companies. The documents, however, do not propose more reform policies on stimulating consumption in the near term. They rather point to more long-term structural adaptations. These would be indeed helpful, but still very slow and challenging to implement. When consumption can be visibly boosted again is therefore still uncertain.

Improving the Business Environment

Already at the very beginning the resolution addresses the improvement of the business environment and puts a strong focus on the private sector:

• Create a fairer and more dynamic market environment to stimulate innovative vitality.
• Encourage, support, and guide the development of non-public ownership economy.
• Ensure that all types of ownership have equal access to production factors, participate in market competition fairly, and receive equal legal protection.
• Enactment of the Private Economy Promotion Law, improving the participation of private enterprises in the construction of major national projects.
• Building a national unified market, strengthening fair competition review, and reinforcing anti-monopoly and anti-undue competition. (Local protectionism strongly hinders the creation of a unified market, but we might see more regional integration initiatives to mitigate this.)

What is means for foreign companies

Economic development cannot be promoted without the private sector. The recent focus on the private sector (simultaneously with the state sector) will see a continuation. Since private sector in China does not mean automatically foreign companies (as a this is a different ownership category), effects for foreign investments might be limited. On the one hand, however, the focus on fairness might have implications for an improvement of the business environment in general. On the other hand, private companies might more likely and more quickly emerge as competitors.

Same Direction for Foreign Investment

Just one of the 60 articles in the resolution focuses on foreign investment, and here also no new reform measures in sight but the usual emphasis on: 

• Expand the catalogue of encouraged industries for foreign investment and shorten the negative list for foreign investment. (There are regular updates here, the recent negative list is of 2021 and the encouraged list was updated July 2022.)
• Remove all market access restrictions in the manufacturing sector. (This remains vague since manufacturing is not part of the negative list anymore.)
• Opening-up in telecommunications, the internet, education, culture, medical services, and other sectors. (In each sector we might see pilots in selected places.)
• National treatment for foreign-funded enterprises in terms of access to factors of production, license application, standards setting, and government procurement. (This resonates with the recent policy focus on fair competition and equal treatment.)
• Optimize foreigner’s living in China such as the relaxation of visa policies, extension of the IIT Incentives for foreigners, guidelines for foreigners making payment in China. (Indeed, there were many of these policies recently.)

What is means for Foreign Companies

For foreign companies, this is a clear manifestation of the previous direction for foreign investment. No major deviations are to be expected in the coming 5 or 10 years or even in a longer time frame. Even though we will see further tangible policy steps in all these areas, independent technologies and innovation (or self-sufficiency) will be (even higher) on the agenda. Nevertheless, companies need to take this renewed confirmation of the long-term trends as another opportunity to carefully scrutinize what that means for them and continuously watch out for implementation policies.