3rd Plenum will treat economy with Chinese medicine

The market is closely watching the long-awaited Third Plenum in China, which will take place in Beijing from July 15-18. Historically, this event has been pivotal in signaling key policy shifts and economic reforms in China. This time around, market participants and China watchers have a very specific question that they hope the Third Plenum can answer, namely whether enough growth-enhancing measures will be announced to revive the Chinese economy after years of underwhelming performance.

So far, there does not seem to be much hope that path-breaking reforms will be announced at the Third Plenum, based on how officials and Chinese academics have been preparing the ground for this event. The problems that have been piling up during the last few years are, however, increasingly serious, from real estate stagnancy to the difficult financial situation of local governments as well as the rapidly declining return on assets, due to over-investment, and the deflationary pressures in the economy.

The recipe to all these woos, as aired by the Chinese leadership during the past few months comes from strengthening China’s manufacturing capacity further, under the mantra of the “New Production Forces.” There is, however, little sign of demand measures, particularly those supporting private consumption. At most some more consumption vouchers are to be expected but certainly not the establishment of a welfare state. Xi Jinping has repeatedly denied any interest in such a model.

More supply without increasing domestic demand will need to end somewhere, possibly in an even bigger trade surplus but this looks increasingly difficult as the West and some key emerging economies have started to impose barriers on Chinese imports. The