The Chinese Communist Party on Thursday put forward an economic agenda that claims to address risks posed by the slumping real estate sector, yet likely falls short of allaying concerns of foreign companies.
This presents overseas investors with a dilemma. On one hand they want access to the country’s vast market, but Beijing has failed to ally concerns about the risks involved.
At a closely watched four-day meeting known as the third plenum, the party released a communique that in some parts adopts language seemingly aimed at encouraging direct foreign investment, which has declined sharply in recent years.
“We must remain committed to the basic state policy of opening to the outside world and continue to promote reform through opening up,” the communique reads.
China will leverage the strength of its enormous market to enhance the capacity to open up the economy while furthering cooperation with other nations, the document says.
The communique also signals a willingness to respond to overproduction issues that have been the target of criticisms from the U.S. and Europe. China will “strive to expand domestic demand” and “deepen supply-side structural reform” to trim excess capacity.
The communique also says China will have “basically realized socialist modernization” by 2035. To that end, the “reform tasks laid out in this resolution shall be completed by the time the People’s Republic of China celebrates its 80th anniversary in 2029.”
The text specifically cites reforms in the socialist market economy, promoting innovation, the rule of law, national security and defense. This is the first time such a communique contained a goal set for the 80th anniversary of modern China.
However, the communique lacks specific measures to put to rest concerns by the business community regarding the troubled property market. The document only says that “we will implement various measures for preventing and defusing risks in real estate.”
Measures taken so far have done little. The government decided in May to have local authorities purchase housing inventory, but there is no end in sight for the decline in value for new buildings, or of the retreat in real estate development.
The real estate downturn continues to persist, and many believe that it will take time to resolve the shortage in domestic demand.
Meanwhile, the document contains drastically fewer mentions of the word “market” compared with the communique for the third plenum in 2013, which was more market oriented. The government led by President Xi Jinping has taken steps that have tightened controls over private-sector enterprises while favoring state-owned enterprises.
This activity is often described as guo jin min tui — the state advances, the private sector retreats. The communique represents a continuation of this agenda.
Half the top 100 Chinese corporations in terms of market capitalization listed domestically or abroad at the end of last year were companies in which the the government owns more than half the stake, whether in voting shares or otherwise, according to an analysis by the Peterson Institute for International Economics, a U.S. think tank.
This is the highest proportion in five years.
At the same time, direct investments by foreign companies dropped to a 23-year low, according to the Chinese government. Many foreign companies are building supply chains that are not exposed to China, and investments are being redirected to Southeast Asia, South Asia and other regions.
This trend does not mean multinationals have completely given up on China. The country remains a huge market with a population of more than 1.4 billion people, and new services, such as self-driving technology, are penetrating quickly. It is difficult for global companies that wish to expand earnings to ignore the world’s second-largest economy.
Although Western firms are concerned about tighter controls and a backsliding away from a liberated market economy, they are also trying to strike a balance by maintaining a certain level of relations with the Chinese leadership. In March, a delegation representing U.S. companies met with Xi, and there has been a series of visits to China by top executives of leading European companies as well.
Another U.S. business delegation is expected to arrive in Beijing in the coming days, according to the South China Morning Post, including executives from Goldman Sachs, Qualcomm, Nike and Starbucks.
It is unusual for a delegation of foreign companies to visit China so soon after the third plenum, according to the South China Morning Post. The group is to meet members of China’s leadership and discuss China’s economic agenda, including how the country will treat foreign capital.
“More than half of companies consider China to be one of their key markets, and the importance of the Chinese market is growing,” said Tetsuro Homma, president of the Japanese Chamber of Commerce and Industry in China.
Many U.S. companies, such as Applied Materials, attend semiconductor industry events hosted in China despite escalating tensions between Washington and Beijing.
Although exporting advanced chipmaking equipment to China presents a challenge, there is strong demand from Chinese buyers for legacy equipment in preparation for tougher controls. Such exports are driving earnings by suppliers.
Third plenums have a history of launching historic reforms. The meeting in 1978 put in place the policy of economic reforms and opening. The 1993 plenum decided China should pursue a socialist market economy.
This time, Chinese leaders have been reluctant to put forward a bold initiative to prop up the economy due to the slumping real estate sector and the prioritization of national security. Despite the repeated slogan of “opening up,” the communique lacks concrete measures that would restore the confidence of foreign investors.
No road map has been drawn for overhauling economic policies and harnessing the potential of the vast market.
Source: Nikkei
