(Bloomberg) — President Xi Jinping unveiled sweeping plans to bolster the finances of China’s indebted local governments, as the ruling Communist Party announced a long-term blueprint for the world’s second-largest economy that offered few major surprises.
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China’s top leader mapped out measures for fixing the debt crisis facing regional authorities in a near-22,200 character resolution of a major meeting published by the official Xinhua News Agency on Sunday. Those plans — already hinted at by state media — centered around shifting more revenue from the central to local coffers, such as by letting regional governments receive a larger share of consumption tax.
Xi’s proposals mark the “third major taxation and fiscal reform” in recent history, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. He cited the 1994 move to increase central governments’ share of revenue over regional authorities, and a string of decisions starting in 2013 that allowed localities to issue bonds on their own, as the other major shifts.
“The central government’s income was set too high and now it’s being adjusted,” Ding said of the framework set under then President Jiang Zemin. The changes “will alleviate the imbalance between the central and local government’s spending responsibilities and income,” he added.
The yuan was little changed in early Monday trading as investors digested the plenum statement and a surprise cut to short-term interest rates. More specific policies could be unveiled later this month by a meeting of the 24-man Politburo which focuses on economic policies for the year in July.
The four-day Third Plenum in Beijing was the first reform-focused meeting of the Central Committee that Xi presided over since securing a precedent-defying third term in power. Some 400 senior officials endorsed his vision for advanced manufacturing to propel China’s $17 trillion economy, suggesting no major shifts to his overarching plans.
Xi last used this meeting to chart economic reform in 2013, when leaders vowed a “decisive role” for markets spurring hopes of more liberal policies ahead. The top leader has since well-telegraphed his vision for greater state control over the economy and his determination to wean the nation off boom-and-bust debt cycles. The resolution reflected that, serving as an affirmation of his long-term vision.
“What seems clear is that China’s leadership is quite happy about its supply-centric growth model, no matter the complaints from the rest of the world,” said Alicia Garcia Herrero, Chief Economist Asia Pacific at Natixis. “The reason probably lies on the urgency with which Xi Jinping wants China to reduce its technological dependence from the US and become self-reliant.
Instead, Xi seemed to be fine-tuning policies to address risks. Officials are under pressure to resolve local governments’ 66 trillion yuan ($9.1 trillion) hidden debt crisis and rebalance the economy, as leaders in the US and Europe accuse Beijing of using exports to compensate for weak domestic demand. Giving a larger portion of consumption tax to regions could address both issues by incentivizing officials to lift consumer spending and offering them a new finance stream.
While details of how that policy will be rolled out were omitted from the broad resolution, slapping additional taxes on goods would risk further stifling consumer sentiment, as the property slump hits citizens’ primary store of wealth. Retail sales rose at the slowest pace last month since December 2022, as China’s second-quarter growth figures undershot expectations.
Officials also pledged to give city governments more autonomy in regulating local property markets, in line with policies over the past two years that allowed localities to better arrest the housing downturn. They also vowed to build more subsidized housing, as well as reforming the pre-sale model, which has led to developers being unable to deliver millions of homes already paid for by residents.
China’s most-powerful leader since Mao Zedong said in a separate explanation that national security had been put in a “more prominent” position by the four-day conclave, suggesting its preeminence over the economy. The official resolution, however, stated Beijing would strive to “achieve positive interactions” between development and security.
Officials also signaled a potential expansion to Beijing’s surveillance architecture, vowing to “explore and establish a national unified population management mechanism.” That marked the first use of that phrase by senior leaders.
“Xi’s emphasis on security shows that the development is eventually aimed at protecting national security,” said Alfred Wu, an associate professor at the National University of Singapore’s Lee Kuan Yew School of Public Policy.
Advancing “high quality development” featured prominently in the report as expected — a vague slogan typically interpreted to emphasize the quality of economic growth over its absolute pace. It centers on Xi’s ambitions to propel China’s economy by moving up the value chain through tech innovation, such as electric cars and solar panels.
The plenum called for private enterprises’ to step up participation in major national technology projects, and pledged to “open major national infrastructure of science research to private enterprises.” That explicit invitation for private-sector participation broke new ground and elevated the role of private firms, according to Bloomberg Economics.
China also pledged policy improvements for developing sectors including artificial intelligence, new materials and quantum technology. The nation vowed to develop more controllable supply chains for areas including integrated circuits and advanced materials.
Developing chips and AI is central to Beijing’s broader vision of replacing technology from the US, which is increasingly trying to ring-fence China. Economists have listed technology self-sufficiency as among the top three economic issues Chinese leaders must tackle in the medium-to-long term.
“I think the third plenum did not change the government’s policy objectives,” said Zhiwei Zhang, president and chief economist at Pinpoint Asset Management, “but it introduced new measures to achieve such objectives.”
–With assistance from Jessica Sui, Cormac Mullen, James Mayger, Yujing Liu, Lucille Liu, Josh Xiao, Tian Ying and Alan Wong.
(Updates with more details, analyst voices.)
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