Is Xi Listening? The 2024 Third Plenum and its Impact on Global Economic Security

CSDS POLICY BRIEF • 25/2024

By Laia Comerma

9.9.2024

Key issues

• The 2024 Third Plenum’s outcomes show that while Xi is aware of the economic ails affecting China’s economy, it offers only partial reforms and furthers the Party’s ambivalence about the role of the market.
• China considers its technological supremacy as the path towards consolidating its status as a global power and potentially overcoming America’s leadership in the global economy, which will continue to affect global economic security.
• The European Union (EU) needs to re-evaluate its economic security toolbox, as the uniform application of these instruments can have a negative effect on its allies, especially Taiwan.

Introduction

Every five years in Beijing, the Chinese Communist Party (CCP) meets through the Third Plenum to announce its prospects and strategy for the long-term reform of economic policy that will be pursued over the coming mandate. Third Plenum meetings can be “epoch making”. The policy that Deng Xiaoping is single-handedly known for, for example, which arguably catapulted and enabled the double-digit growth of the Chinese economy during the last three decades, the “Reform and Opening Up” policy, was announced at the 1978 Third Plenum. It was at this same plenum that Deng’s ascension to power was confirmed, in parallel with its landmark economic policy. This is how significant plenums are, or at least can be.

Xi Jinping has already presided over three Third Plenums, that of 2013 – where his mandate was just beginning and he was supposed to set up his economic plans and vision for China –, the one in 2018 and the last one on 15-18 July 2024. This, in itself, is notable, as no other chairman had presided over more than two plenums, due to the 10-year limit in their mandates that has been constitutionally effective since Mao Zedong and that Xi lifted in 2020 to allow himself a third unprecedented mandate at the helm of the CCP.

The Third Plenum in 2024 that took place in July is important in at least two ways. First, it was an opportunity for Xi to take stock of the achievements and shortcomings of the decisions and reforms he advanced in 2013. Second, China is in the midst of an economic crisis, and this plenum was an opportunity for him to show that he was aware of the hardships his people are going through and that he had a roadmap to solve them. Accordingly, Xi tried to show that he has a plan to make the Chinese economy change course away from price deflation, the post-pandemic lockdown recession, a major crisis in the property market and low consumer confidence. In essence, Xi tried to signal that there was a light at the end of the tunnel and he would drive China there.

Yet, as this CSDS Policy Brief shows, Xi’s stipulations at the 2024 Third Plenum have implications that are much broader than the Chinese domestic economy, as the state of China’s economy has notable spillovers into the global economy. For example, the outcomes of the 2024 Third Plenum can potentially impact foreign investment into and away from China, and thus on global capital flows. To better understand the consequences of the 2024 Third Plenum, we first compare the outcomes of the 2013 and 2024 plenums in order to analyse the evolution of the Chinese political economy. We then consider the effectiveness of the proposed reforms and outcomes, and their implications for European and global economic security.

Is Xi listening?

The outcomes of the 2024 Third Plenum consisted of a communiqué, which was essentially a repetition of CCP dogma, slogans and buzzwords, and a Party Resolution “on Further Deepening Reform Comprehensively to Advance Chinese Modernisation”. The title might have disappointed Chinese and global investors interested in the Chinese economy, as it suggests that the Communist Party did not take advantage of the 2024 Third Plenum to shift its focus from supply-side concerns (i.e. catching up with the United States (US) through the modernisation of the Chinese economy towards high-tech and Artificial Intelligence-based sectors, which it believes is the key to overcoming the potential pervasive effects of demographic decline in China) towards solving the demand-side of the equation. The choice facing the 2024 Third Plenum and Xi was whether to keep the sole focus on promoting a “major industrial transformation towards new productive forces”, to use the CCP slogan, or to stop neglecting consumers and focus on stimulating domestic demand.

Indeed, China has been suffering from sluggish consumer spending, especially since the housing bubble broke with the default of Evergrande in 2021, and overall low business confidence that has translated into low investments in productivity and growth. Its debt-to-GDP ratio reached a record 288% in 2023. This is worsened by China’s rapidly aging population and the fallout from the COVID-19 pandemic lockdown. China’s chronic overcapacity also has deep domestic effects, having provoked a severe price war in some industries that is hampering profits and devouring capital. For instance, 27% of Chinese automobile manufacturers were unprofitable in May 2024, according to government statistics. This confidence was further curtailed through the CCP’s crackdown on fast-growing sectors such as platform economies, with the market capitalisation of leading Chinese tech firms like Alibaba and Tencent plummeting up to 75% from their peak in 2021. China’s latest Qinglang (“clean and bright”) campaign aims to penalise social media influencers and internet celebrities for ‘showcasing a luxurious life built on money to attract followers’.

Overall, this goes back to the complicated relationship between the CCP and market capitalism, as it aims to control and direct market forces while benefiting from innovation and creativity, a balance that is seldomly achieved. Having failed to achieve this balance over the last few years, investors had hoped that this plenum would result in a re-balancing of party-business forces. Meaning that the Party would give greater freedom to specific sectors to help them grow and make the Chinese economy recover, while encouraging households to buy and solve the housing slump that has so greatly affected millions of Chinese who had invested their life savings into buying a house that was never built. This was, to a certain extent, the case with the Third Plenum. Xi indeed had listened, but was only partly willing to let go of his reclaimed control and centralisation of the Chinese economy, as the following section will explain in more detail.

Ten years on: an account of “Xi-nomics”

The 2024 Third Plenum only reiterated the centrality of Xi. First, the Party Resolution starts off by reaffirming the centrality and pre-eminence of Xi Jinping, ‘with great historical initiative, tremendous political courage, and a strong sense of mission’, around whom the Party is united. Thus, the importance of political integrity, and the centralisation and personalisation around the leadership of Xi Jinping that has been observed during the last ten years in China does not appear to be dying out, and instead, its dogma – so-called “Xi Jinping Thought” – retains its supremacy as the Party’s Guiding philosophy along with “Deng Xiaoping Theory” and “Mao Zedong Thought”. Indeed, the resolution urges the Party to ‘stay confident in the path, theory, system, and culture of socialism with Chinese characteristics; and uphold Comrade Xi Jinping’s core position on the Party Central Committee […] and its centralized, unified leadership’.

Second, what also stands out is the continued importance of “national security”, which is mentioned 13 times in the resolution and where seven whole sections are devoted to the issue, as compared to the three sections in the 2013 resolution. In line with China’s definition of national security, the resolution calls for new ‘methods for social governance and [building] a new security architecture’, and national development is considered a key factor in preserving national security and stability. Lastly, the influence of external factors on national security is accounted for, including counter-sanction mechanisms, and the protection of the interests of Chinese citizens and legal entities abroad, as well as China’s own rights and interests in global security governance.

When it comes to economic policy, the most relevant change when compared to the 2013 Third Plenum is that so-called “Chinese modernisation” is equated to the goal of ‘reform and opening up’, which has prevailed since the 1978 Third Plenum presided over by Deng Xiaoping. This asserts that the only path towards modernisation is not the one promoted by the West, of modernisation through liberalisation and democratisation, but instead that China is a unique case, with its idiosyncrasies, as a vast, diverse country, and therefore that pre-existent rules do not apply to it. In other words, it needs to go its way, which is often portrayed as “peaceful development”, “social development” or “socialist modernisation”. This points to the state keeping a tight grip on market forces, to ‘maintain order in the market and remedy market failures’ inherent in capitalist systems. Therefore, the latest Third Plenum did not manage to resolve China’s ambivalence about the market (i.e. noticeable also by the latest regulatory crackdowns), but it instead aimed to institutionalise the state’s control over the economy under state oversight and regulation, opting for more predictability and clarity, instead of abrupt repression.

Finally, the main emphasis in the 2024 Third Plenum is the familiar focus of China’s economic policy over the last few years on guiding its economy through a new industrial transformation, infused by “new productive forces” or “innovative capabilities”. In other words, “high-tech enterprises” that China sees as the way to avoid getting stuck in the middle-income trap and continue fostering growth while moving away from its dependence on the manufacturing sector. The resolution puts a strong emphasis on the partnership with Research & Development (R&D) institutions and advanced-level research universities, which should guide the market to allocate resources more effectively. Hence, the 2024 Third Plenum points to the solidification of Xi Jinping’s economic policy, the supremacy of the state over the economy and the continued central role of the state-owned sector over the private sector. It does so in a more confident way than the 2013 plenum where Xi Jinping was simply solidifying his leadership, even while hinting that, to a certain extent, Xi recognises the ails affecting China’s economy. However, while Xi recognises these problems he is not willing to entertain a radical reform of China’s economic policy, instead responding through limited regulatory reforms on, for instance, the housing sector, the platform economy or the hukou system. Thus, the 2024 plenum cements the path outlined in 2013 towards limited liberalisation, partial rural land reform, State-owned Enterprise reform and moderate market access for outsiders.

Global and European implications for economic security

When Xi Jinping met Vladimir Putin in February 2021 in Beijing, so just before Russia kicked off its invasion of Ukraine, he told Putin that China wants to win ‘the strategic initiative amid accelerating global changes of a like not seen in a century’, where it sees itself having a pivotal role. The 2024 Third Plenum only re-emphasises this logic, with potentially major implications for European and global economic security. China aims to have a key role in the reform of global economic governance, through its Global Security Initiative, its Global Development Initiative and its Global Civilisation Initiative. Such initiatives have the objective of safeguarding China’s sovereignty and development interests, and fostering a “favourable external environment”, which translates into a global governance system where non-interference and unqualified sovereignty prevail over universal values and human rights, in favour of national development. This includes the consideration of Taiwan as a Chinese domestic issue and the potential for unification through the use of force. The Third Plenum has also seen no apology for previous crackdowns behind alleged external influences, as was claimed in the case of Hong Kong’s mass protests in 2019, or any condemnation of Russia’s invasion of Ukraine because of the perceived intrusive military expansion of the West via NATO.

Subsequently, the 2024 plenum hints at the continuation of China’s pursuit for technological supremacy as a way to solidify its status as a global power on a par with the US. Thus, the state will continue encouraging and subsidising investments on semiconductors, space technology, electric vehicles, military technology or microchips. This points towards the continued validity of European fears about the integration of Chinese technology in economic goods, around trade dumping and strong state subsidisation of the Chinese economy. Yet, as unintended effects start to become clearer and current trade defence instruments and policies are implemented and evaluated, the EU should re-evaluate and re-define those policies, so as not to undermine its allies, including Taiwan, through the uniform application of strategic autonomy, economic security and de-risking policies.

Last but not least, the 2024 Third Plenum does not offer a forceful solution for the economic recession that the Chinese economy is undergoing. The plenum seemingly expands its focus from the afore-mentioned industrial transformation towards the high-technology and innovation sectors. This includes other considerations and issues that are affecting its domestic economy, such as restoring business confidence, considering a new revenue model for local governments so as to overcome the housing slump or gradually establishing a tighter safety net for its workers and pensioners, including migrant and rural workers. Yet, these fractional reforms are unlikely to solve China’s economic crisis, and its slow domestic growth and limited investment overseas will continue having a pervasive effect on global growth, and the limited domestic demand will keep on resulting in overcapacity, resulting in Chinese goods flooding global markets.

While since its peak in 2017 Chinese FDI into Europe has continuously been decreasing, Chinese investment is still an important source of revenue for European countries and companies, with the Belt and Road Initiative (BRI), for instance, having ensured the construction and acquisition of large infrastructure like the Port of Piraeus in Greece, railway and Electric Vehicle investment in Hungary or the Bar-Boljare highway in Montenegro. The new Economic Security Strategy, together with the array of trade defence instruments under the umbrella of its ‘Open Strategic Autonomy’ policy, partially represent the realisation of the economic security implications of Chinese investment in Europe, which mostly come from State-Owned Enterprises that the EU largely considers as unfair competition due to explicit or implicit preferential subsidies.

The 2024 Third Plenum promises to improve the business environment for foreign investors in China, even expanding the number of industries where they are allowed to invest and removing market access restrictions in the manufacturing sector, as well as to protect and promote Chinese investment abroad. However, on this the Plenum stays only at the level of vague, token commitments. In line with the focus on industrial transformation, the only mention in the Third Plenum’s Resolution of the BRI refers to the implementation of its Science, Technology, and Innovation Cooperation Action Plan, calling for a redoubling of efforts to cooperate in the digital economy and Artificial Intelligence to improve cyberspace connectivity and build a multidimensional network to connect BRI countries.

Conclusion

The 2024 Third Plenum shows that China does not appear to want to change course. This increases predictability, and the indication that the pervasive effects of Chinese foreign investment will continue, if not increase. However, while providing continuity, this perpetuates the dilemmas and inconsistencies in China’s economic policies due to state control of the economy, and its unattained balance between the publicly- and the privately-owned sector. In this context, the incoming EU leadership should put as a priority the redefinition of its “China policy”, coming up with a more pragmatic, actionable definition than the current tripartite one of China as a “partner, competitor and rival”, which often ends in gridlock due to the substantial trade-offs it imbues.

Thus, instead of falling for the plain defensive option of restricting and controlling the export and import of technological goods, the EU should focus on nurturing and investing in its domestic production of such goods and other innovative and R&D sectors to keep up with China, as the Economic Security Strategy calls for, while critically revisiting the unintended spill-overs of its comprehensive application of its de-risking strategy. The toolbox of trade defence instruments that the EU has been designing since 2017 will be a fundamental contribution to the protection of the global economic governance regime, if it manages not to fall into a protectionist trap, but their policy evaluation and re-definition will be essential if the EU does not want to turn in upon itself, into seclusion and a perfect isolation.

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