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I'm Bonnie Lin, Director of the China Power Project and Senior Fellow for Asian Security at the Center for Strategic International Studies. In this episode of the China Power Podcast, we're discussing the Third Plenum of China's 20th Central Committee.
This plenum occurred in mid-July and was stated to be a key leadership meeting to set the direction for China's economic policy. What were the key and major takeaways from this meeting, and what were the priorities laid out by Xi Jinping? How does China seek to address its current economic headwinds? Here to answer these questions and more is Dr. Scott Kennedy. Dr. Scott Kennedy is a Senior Advisor and Trustee Chair in Chinese Business Economics at CSIS.
a leading authority on Chinese economic policy and U.S.-China commercial relations. Dr. Kennedy has traveled to China for 36 years. His research focuses include China's innovation drive, China's industrial policy, U.S.-China relations, and global economic governance. His articles have appeared in wide-range publications, including the New York Times, Wall Street Journal, Foreign Affairs, Foreign Policy, and China Quarterly.
Dr. Kennedy hosts a China Field Notes podcast featuring on-the-ground voices from China, and the trustee chair also runs the Big Data China Initiative, which is a big
which introduces path-breaking scholarly research to the policy community. Scott, thank you for joining me today. Happy to be here with you, Bonnie. Scott, we've been hearing about China's leadership third plenum for weeks, and some were speculating that it could provide a key opportunity for China to make some big changes. What is a third plenum and why has there been so much attention to it?
Plenums are very important in Chinese politics and decision-making. The Chinese Communist Party, every five years, has a new leadership slate that they put together. And about once a year, that full leadership at the national level, the Politburo, the Central Committee, get together
in what they call plenums, which are held in a hotel in Beijing with no outsiders present, no media present to discuss important topics.
The third plenum of their sessions is often about economic issues. It was the third plenum in 1978 of the 11th Party Congress that decided to move toward marketization and is the launch date of the reform and opening era. In 1992, Jiang Zemin led the third plenum of the 14th Party Congress that decided China should try and create a socialist market economy. And 11 years ago,
Xi Jinping led the 18th Party Congress's third plenum where they said the market should play a decisive role in the economy. So 11 years on, here we are. Xi Jinping's been in power for a long time and people are concerned about China's economy. And this is a long anticipated meeting, which is supposed to have set a clear direction for where China is going, not only on economic policy, but on other important issues as well.
And since the meeting was long anticipated, what did we as observers from the outside expect or perhaps hope to see from the plenum? And what did the international community believe that China should have included at the meeting? Sure. Well, I think most people watching China the last 10, 12 years think
would say that growth of the economy has slowed down, tensions with the rest of the world have increased, and domestically, there are growing internal tensions. China has long had a high level of inequality, but people's
feelings about those inequality have turned more negative. Part of this is a reaction to the pandemic and China's zero-COVID policies, but part of it is really about the change in orientation of the Communist Party under Xi Jinping's leadership in a more statist direction domestically and more sort of direction internationally. Given all of these challenges, I think there were in many quarters a hope that
that the leadership would take important lessons from these difficulties and potentially shift directions back in a more market-oriented, liberalizing direction. And I think that was hope. I don't think that was necessarily people's expectations. My guess is most people thought that
the leadership would say that they've done a good job and that they would continue on the path that they had already started. But nevertheless, there's that difference. And you never know what's going to happen in a meeting. And so you had to wait and see. And that's what all of us have been doing the last week. And Scott, is that what happened? China said that it would continue on its current path. What is your assessment of what came out of this year's meeting? Were there any major outcomes that surprised you or was it relatively underwhelming?
I think that the plan that they lay out in this decision document, which is the all-encompassing document, 17,700 words, isn't that surprising in terms of the trajectory, which is basically let's stay the course. And that course is continuing to emphasize growth through investing in advanced technologies, what they call the new productive forces.
as well as trying to reduce inequality, green the economy, and integrate urban and rural China into sort of a unified growth trajectory and unified national market.
Have China continue to be more influential internationally? None of that is surprising, but it's the detail in which they lay all of this out. And one of the things that is clear is the party emphasizes again and again the importance of the market. Yet it also again and again talks about the importance of the party state
And instead of saying that the market is really an alternative institution that really decides who gets what and who has power and authority, the market in this reading sounds a lot more like a tool of the state, which it can or cannot use depending on circumstances. They talk a lot about market failure. And I think one of the reasons they do that is because of the sense of crisis that
China is domestically facing a lot of internal tensions and even more importantly, international tensions because of how the relationship with the U.S. and the West has soured. And as a result, national security gets pride of place in this decision.
not only as a separate area of focus, it has its whole new chapter to discuss it, but it weaves itself through the rest of the discussion. And they talk about the need to align economic policy with national security imperatives. And so that just hits you in the face so strongly that
This is the direction China is going in. There is nothing that is likely to make China waver from the path that it is set upon. Since the plenum largely reaffirmed China's current path, were there any outcomes of the plenum that really stood out to you as either new or significantly different from before?
I think there's some new details on things that they say that they need to do, but nothing radically life-altering that one wouldn't have expected. For example, they talk about the need to reform the household registration system. China has an extremely large population of everyone knows people.
Largest number of people live in rural China. Many of them have been farmers who've then moved into townships and have worked in factories. But those places, the ability to make a living is limited. And so many of them have been migrants that have gone to coastal cities.
The jobs there have been harder to come by lately, as well as it's been difficult for them to access social services. So it also means that they hoard their savings for rainy days.
So people think a critical element to spur consumption is to allow people, regardless of where they're born, to take up permanent residence in cities and get access to all the social services. This document suggests that China is moving along that path, and that is important. They've never discussed this in a plenum document before, but they still leave out a lot of the details about how this is going to occur, at what pace, and
and what it will mean for rural Chinese and what it will mean for cities. And it's the fact that they've used a lot of language but left out the details that leads people to wonder, is this really going to be implemented? Who are the winners and losers going to be? How much is it going to cost? Will it really drive a new wave of consumption as people
hope that it would. And so there's those kinds of things there. The one thing that is totally new, like no one expected, is the identification of 2029 as an important marker for when China should complete the reforms that are identified in this decision, the 60 plus reforms that they lay out. 2029 is the 80th anniversary of the founding of the People's Republic, but it's never been identified as an important date aside from that.
In previous documents, for example, in the 14th five-year plan that China currently has and in other documents they've identified 2035 is when China should achieve full modernization and 2049 when China should be a global power in the 100th anniversary of the founding of the PRC.
So people are wondering why is 2029 so important? There's no reason other than the anniversary. And it may be because they need to sort of put a fire under everybody to get them to be more assertive and aggressive in carrying out these reform policies. By coincidence, 2029 is a little bit after Xi Jinping's current third term ends. And so some people are speculating that what it means is Xi Jinping is going to stay on for fourth term.
But we really don't know because that's not detailed at all. And we won't know that probably until we get to 2027 at the end of the current 20-party Congress and see what happens for the next one. So there are lots of details.
Little specific facts that they hadn't discussed before, but the overall trajectory, Bonnie, is still what they've been signaling over the past few years. Thank you. And from your perspective, does staying the course actually help China deal with any of the major domestic problems it faces?
Problems that we're seeing in China's real estate market, the high debt hold by local governments in China, and of course, what some argue as the financial crisis that China already faces. What is China's plan for dealing with these major economic challenges?
Despite the 17,700 plus words, Bonnie, and all of the listed reforms that are there, the real answer is we just don't know. They talk a lot about local government finances and the need to get local governments more money.
for there to be greater transfers from the center to localities to give local governments a greater ability to raise income taxes potentially for property and that would help. But it really depends. The devil will be in the details for sure. And none of that is mentioned. China's got a declining population, but there's really nothing in there that directly addresses that issue other than saying, you know, the social safety net, pensions, health care,
Etc needs to be expanded low-income housing needs to be created but but no specific details you know China has a real mega real estate problem right now and there is identification of Support for low-income housing other support for real estate things that they've announced But we really won't know if these things will work for some time because the details are just not there and I think to some extent
My hesitancy to say, to be more definitive, is some amount of promise fatigue. The party has long said that it's going to tackle a whole variety of these problems, and many of them have gotten...
worse, some gotten better, but some worse. And so we're not really sure. And so I think what we can say is that they're going to try harder. They're going to roll out new policies. They are going to put more money into these things. But whether China's households, private entrepreneurs, foreign investors,
then act in a different way, expand investment, consumption, become more productive. We will just have to wait and see. And Scott, do other U.S. experts analyzing China share your skepticism? What is the center of gravity in terms of how U.S. experts are looking at the third plenum? Sure. Well, we're just a day out from when they released the decision. And so you can look at folks on Twitter and
and other social media and emails between people. So I've done no formal survey or polling or comprehensive reading of the landscape. I would say though, that over the last three to four years, particularly since the pandemic, analysts and observers of China's economy have become more
pessimistic about the trajectory, partly because of significant structural reforms that have to be tackled. You mentioned debt, the population, but also statist policy. And if you read this decision, the emphasis on the role of the party state is loud and clear. So they do talk about
the market playing a decisive role, but they also emphasize the critical central role of the party state and the market actually sounds more like a tool of the party than an independent alternative institution. There's a big emphasis on production and investment as opposed to consumption. There's still a strong emphasis on the role of the public sector and state-owned enterprises. There is emphasis on the need to align growth in the economy with national security.
In fact, there's a whole section on national security. And in the discussion on economic openness with the rest of the world, they do talk about incremental liberalization and increase of market access to China, but also at the same time, leveraging China's large market to promote China's own economic interests.
internationally. So all of that would add up to a statist approach. And I think most Western observers are skeptical of the results that will be born from that approach. They've already seen a variety of challenges that have arisen in China's economy as a result. State-owned enterprises are far less efficient than private companies, for example. And to
Despite 40 plus years of opening to the outside world, China doesn't have a level playing field domestically. And some of the approaches it uses to govern its domestic economy are increasingly significant in third markets. My guess is many people listening today have heard about China's overcapacity problem that are challenging to the United States and others. And so you want to give the benefit of the doubt to China.
China that it best understands its problems and it knows what best to do. On the other hand, we've seen the results so far with declining growth, increased debt, structural problems, growing antagonism with trading partners. There's no change of that course. And so one wonders how they're going to manage using this economic governance model in this political economy with the rest of the world and at home. That's what worries me.
Scott, you mentioned earlier that a focus of China's policy is to invest in advanced technology as new productive forces. Was there anything in the third plenum that specified either new investments in this area or new initiatives that you weren't already tracking? This was a carbon copy of things that we've seen before this section. The specific industries that they identified are ones that they've talked about previously.
many times before. Advanced information technology, AI, aviation and aerospace, new energy, new materials,
advanced equipment like robotics, biomedicine, quantum. They talked a lot about the need to integrate the digital economy with the physical economy and about greening the economy in many ways. None of those things were new in this document. I think what they did talk about is the need to find new kinds of investment mechanisms to channel
funding to the right institutions and companies to develop those technologies in those markets. But this emphasis on using advanced technology as a new growth driver for the future and the specific industries that they identified, that has been previewed many times before. Thank you.
Let's shift to now talk about personnel. There was not much mention, either good or bad, about Xi's economic advisors, and this was in contrast to the reference to former Chinese Foreign Minister Qin Gang's resignation, as well as the great violations of party discipline state laws involving several former PLA leaders.
So this raises the question of how should we view Xi's economic and financial team? Scott, what is your assessment of them? Do you think Xi Jinping's economic team has the knowledge, has the experience, and know-how to deal with all the problems that China faces economically? Is the current stasis that we're seeing a reflection of a either relatively inexperienced team, or is this a result of something else?
You can handicap individual officials and their experience. You can look at how information and reports are created and circulated within the system. You can look at how economic policy ranks as a priority relative to other things.
At the end of the day, I think those things are most likely secondary to the overall orientation that they've chosen. And the leadership as a whole has gotten behind this idea that although markets are important, the Communist Party needs to play the central role in directing the
trajectory of Chinese economy, its society, its relationship with the rest of the world, and shouldn't be shy about intervening and pushing and pulling where needed. I understand that sense of confidence after several decades of a lot of success. And by looking at other countries that have fallen on economic hard times or political hard times with domestic
protests, tensions with other parts of the world, and wanting to avoid those things, and also being worried about corruption, etc. But my own sense is that this approach can bring certain kinds of success with specific kinds of technologies, but it also generates a variety of pathologies. China can't grow as fast as it did, but it doesn't need to grow this slowly. There can be higher levels of public enthusiasm about the direction of the country, its relationship
with the rest of the world could be stronger, not just because maybe the U.S. or others could take more reassuring policies, but so could
China. I think all those things are of a piece. But at the end of the day, of course, I'm just a watcher. The Chinese have really decided what direction they want to go in. And having run into problems, their solution is not to abandon their approach, but to try to do it in a better way. And so my guess is that this will lead to slower growth and greater challenges than they otherwise would have. But China also has an immense...
ability to muddle through and cope. It has a lot of advantages that other smaller powers don't. And so while this is the approach that they've set is not what I would call anywhere near ideal,
They will continue to motor along and move along. I think the likelihood of a mega crisis enveloping this economy or party state is pretty low, but they could do a lot better. And Scott, I just want to make sure I'm understanding what is driving China to double down, maintain its current economic approach,
and as you suggest, try to muddle through. There were several major factors that you mentioned or suggested. I think the first one is that the CCP's desire to drive the economy and its confidence in itself.
And the second one was the CCP's belief that national security economic development should be linked. And national security considerations are heavily shaping China's economic policies. But are there other reasons for why China is not directly tackling any of the major economic challenges? Are there other factors that you mentioned that I missed? You know, I don't want to use...
My own personal perspective about this, I'm really just trying to, as an observer, figure out why they're doing what they're doing. And I think if just a little bit of history on this, when Xi Jinping was being examined as potential leader 2007, 2008, I know he's elevated to vice president and he's probably going to be a Hu Jintao successor, but not guaranteed yet.
At that time, if you were in Zhongnanhai, the Communist Party headquarters, and you looked around the world from that perspective, you would have noticed that there was a lot of political tumult in other post-communist regimes, in Russia, in the Middle East. You would have been observing the global financial crisis and what happened to countries that had market economies, their financial institutions.
You would have noticed domestic corruption in China, weakness of the PLA.
That would have suggested to you that what China needed to do was not become a market democracy, but double down and return to its Leninist roots and strengthen those. That's what Xi Jinping did when he became leader. They did pass at the third plenum in 2013, 11 years ago, a document that said that they would allow the market to play a decisive role in allocating resources. But Xi Jinping and the leadership were fair-weather reformers. As soon as they ran into problems
in the housing market and stock market and foreign exchange, they went back to the tools that they felt most comfortable with, which was state powers. Then you've got the trade and tech war with the United States, the pandemic, the war in Ukraine, intensification of challenges across the Taiwan Strait. All of those things push the buttons of nationalists to
Utilize the powers of the party state.
So I think so from their perspective, I think they feel like they're under siege. They're facing a lot of challenges domestically and internationally. And this is the approach that they think is best. They have some things that they can crow about electric vehicles, dominating solar, high speed trains going to the other side of the moon. They have lots of high tech technologies.
victories. And certainly China today looks way, way more economically successful than 40 years ago, even 10 years ago. So they can point to signs of progress.
I think China's leadership believes that they are using the right approach to deal with the real estate problem and its financial system. Not the way economists necessarily would suggest to do it, but in their view, the most important thing with regard to real estate and the financial system and local governments is to avoid a real mega crisis from blowing up and sinking the economy.
They're also trying to gradually reduce the role of real estate in the economy, which has been estimated by some to be up to 30% of the economy. And so to gradually address those problems without causing a crisis. So it's not that they haven't put attention to it and are ignoring it. They think what they need to do is manage those. At the same time, those international problems that are significant and they need to build up
a much more resilient economy that is more internationally powerful. And in fact, a lot of the language about sort of economic security in China sounds a lot like the debate in Washington, in Tokyo, in London, in Berlin, in Brussels. It's actually increasingly similar language
and echoed everywhere about the importance of resilience as opposed to achieving the greatest levels of efficiency through globalization and a division of labor. I think there's reasons why there's relationships with the rest of the world are tense that aren't simply the product of policies adopted beyond China. I think China shares in the responsibility, but nevertheless...
If you're in Beijing and you think it's primarily the fault of everybody else, then you're going to also double down on strategies that reduce your dependence on the West and increase your economy's ability to be resilient through all different kinds of crises.
Thank you, Scott. And I now want to shift to ask you to look forward a bit. I know it's incredibly difficult to predict China's growth moving forward, but you mentioned that we should expect slower Chinese growth. What is a range of estimates that you're comfortable sharing with my listeners in terms of what you expect China's growth to be in the next year or two? Well, officially, China last year grew around 5%, and it's slated to do the same this year.
My guess is that the reality is a little bit lower, perhaps 3% or 4%. China's nominal GDP grew last year at 4%. It's one of the first times nominal GDP grew slower than real GDP, which means that there was some deflation. But because of the real estate crisis and tensions with the rest of the world,
and sort of growing politicization domestically, that's had a huge effect on consumption by households and investment by private companies. So with a little bit of progress with the housing market, with somewhat reduced tensions with the rest of the world, there could be an uptick in domestic confidence and you could see a rebound in the economy in the next couple of years that generates better growth. I mean, China can have economic cycles. It's not all structural.
So if China grows anywhere between 3% and 5% over the next year or two, I think that would be within reasonable expectations. It could face more challenging times than that. If it got the policy mix just a little bit better, it could get above 5%, perhaps, which would be, for economy, its size.
pretty darn impressive. So there's still a range of outcomes that are possible. And I think folks listening would not find it unfamiliar to understand that we are in an age of uncertainty, not just at home, but with China and many parts of the world.
And Scott, my understanding is the Rhodium Group has a lower forecast for China's expected growth. From your perspective, what drives their lower estimates that China's GDP will grow at a slower pace than what you outlined earlier? I think the Rhodium Group's basis for having very low estimates, I don't know the precise estimates that they have for growth,
The future, they've said growth in 2022, 2023 was probably zero to one, one and a half percent. I think the reason why they are more skeptical about China's growth prospects is the very large pile of debt that Chinese financial institutions have and the amount of money that needs to be spent to service that debt.
and the signal that that growing debt is a reflection of a very low productivity in the investment that they do have. And then you also add to that a declining population, declining workforce, and it's very difficult to see growth being achieved domestically. And so exports might be the most likely source of a bright spot. But if you've looked at
Sounds coming from Washington, Brussels, Tokyo, Brasilia, elsewhere. With growing Chinese exports, you're also seeing a very significant backlash. So I think because of the structural challenges China faces domestically and growing pressures internationally, the rhodium group tends to be at the bottom end of the spectrum in terms of predictions or forecasts for growth.
Thank you. Final question for you as we close out this podcast. China has outlined some pretty ambitious foreign policy goals as well as defense goals. This includes continuing to modernize the PLA at an unprecedented rate. As you look at China's economy slowing, whether it's 3% GDP growth or even lower than that, what is your big takeaway in terms of whether China can sustain a lot of its foreign policy agenda and defense spending? I
I know for those of us that work on these specific kinds of areas, these things seem very expensive. But from the party's perspective, when you're sitting on top of a $15 trillion economy with 45% savings rate, you look at risks and opportunities and places that you have to spend. Investment in high tech is one of these things.
few areas of offense that the Chinese government has at its disposal. And so even though investing in semiconductors and aircraft and robotics and AI and quantum is expensive for any individual company, I think it's basically a bottomless well of funding at
company's disposal if they have plans that they can persuade investors to support, whether those are from commercial banks or state investment funds or the stock market. I think for defense, I don't see the Chinese government letting up on strengthening the PLA and advancing their weapons capabilities and
all the joint force capabilities, et cetera, for the kinds of challenges that they face. I think where there may be skimping is in international aid to developing countries, investment through the Belt and Road. There, we've already seen the Chinese pullback since 2017, 2018. And that you see rhetorically China through the
Global Development Initiative, Global Civilization Initiative, the Belt and Road, emphasize that China stands with other developing countries. It's also talked about the need to continue to provide market access to the least developed countries, to China and things like that. But I don't think you're going to see a whole lot of financial outlays for the developing world. And so I think that side of the expenditure sheet will probably be
skimped on more than these other areas. Awesome. Thank you very much, Scott, for this very informative conversation about the third plenum. You shared with us how China assesses its current economic problems, but also the factors and considerations China has to take into account when developing responses to tackle these challenges. And as you mentioned, China believes largely staying the course is the right response. Thank you very much for joining me today. Happy to be with you, Bonnie.