Third plenum takeaways: China banks on innovation

This past week, China’s leadership held a crucial four-day meeting to discuss and outline long-term vision for the country’s economy. Known as a plenum and held once every five years, the meeting of the 20th Central Committee of China’s Communist Party (CPC) finished with leaders reiterating their commitment to wide-ranging economic policy goals, ranging from modernising industry to expanding domestic demand and curbing debt and property sector risks.

A communiqué issued upon conclusion outlined the goal of building a socialist market economy over the next decade, identifying several key areas as priorities for reform. “By 2035, we will have finished building a high-standard socialist market economy in all respects, further improved the system of socialism with Chinese characteristics, generally modernised our system and capacity for governance, and basically realised socialist modernisation,” the communiqué read. “All of this will lay a solid foundation for building China into a great modern socialist country in all respects by the middle of this century.”

Economic reforms

In order to build the ‘high-standard socialist market economy’, China aims to push ahead with economic reforms, enhance democratic governance, foster a strong socialist culture, improve people's livelihoods and advance its global influence. “The role of the market must be better leveraged, with a fairer and more dynamic market environment to be fostered and resource allocation to be made as efficient and productive as possible,” the communiqué stated. “Restrictions on the market will be lifted while effective regulation will be ensured to better maintain order in the market and remedy market failures.”

The CPC urged deepening supply-side structural reform, improving incentive and constraint mechanisms for promoting high-quality development, and creating new drivers and strengths for realising growth. "We will improve the institutions and mechanisms for fostering new quality productive forces in line with local conditions, for promoting full integration between the real economy and the digital economy, for developing the service sector, for modernising infrastructure, and for enhancing the resilience and security of industrial and supply chains," it stated.

According to Reuters, China’s economy has been weathering the effects of low wage growth, job market uncertainty and industrial overcapacity, and grew at a slower than expected pace in the second quarter, leaning hard on industrial output and external demand. "There still appears to be a tension between policies aimed at boosting economic security and expanding the supply-side of the economy, and those aimed at giving market forces a greater role and rebalancing growth toward consumption," it quoted Julian Evans-Pritchard, head of China economics at Capital Economics, as saying. "Supply-side policy will continue to prevail," Tommy Wu, senior economist at Commerzbank AG, told Reuters as well.

Innovation and green development

China’s government is banking on innovation, green development and consumption as the keys to the country’s future growth. The communiqué re-emphasised China's quest for ‘new productive forces’, a term coined by Xi last year that envisions scientific research and technological breakthroughs that could modernise manufacturing and kickstart a new era of high growth. “Education, science and technology, and talent function as a basic and strategic underpinning for Chinese modernisation,” the communiqué stated. “We must fully implement the strategy of invigorating China through science and education, the strategy of developing a quality workforce, and the innovation-driven development strategy, make coordinated efforts to promote integrated reform of institutions and mechanisms pertaining to education, science and technology, and human resources, and improve the new system for mobilising resources nationwide to make key technological breakthroughs.”

The Netherlands-based ING Group, in its analysis of the plenum, noted that China already excels at adopting, refining, and implementing existing technologies. “The next step, in our view, is to foster breakthrough innovations,” it stated. From 5G to electric vehicles, China has already leapfrogged other technological powerhouse nations to become a market leader in several industries. Consistent with its focus on green development as a priority, it has positioned itself as the biggest supplier of alternate energy products, from solar panels to large-capacity batteries.

The plenum also called for the promotion of green development through carbon reduction, pollution reduction, and improvement of environmental governance systems and low-carbon development mechanisms. “With China’s goals to hit peak carbon by 2030 and carbon neutrality by 2060, the green economy will likely remain a major long-term area of growth,” the ING analysis stated.

Cultural innovation

Where China has secured a dominant position in several industrial and technological sectors, the country has enviously looked at the soft power the cultural industries of the United States, India, Japan and more recently, South Korea and Turkey have allowed them to wield.

In addition to the expected focus on technological innovation, the communiqué also mentioned stimulating cultural innovation and creativity, including drawing upon traditional Chinese culture. “Chinese modernisation is about both material abundance and cultural-ethical enrichment, with the aim of promoting all-round social progress and well-rounded human development,” China’s ambassador to the US Xie Feng said in his speech at the Harvard Kennedy School China Conference 2024. The communiqué, meanwhile, noted that China must “stay abreast of the latest trends in information technology, cultivate a vast pool of talented personnel in the field of culture, and ignite the cultural creativity of the entire nation.”

Foreign policy of peace

Finally, the CPC reiterated that Chinese modernisation is the modernisation of peaceful development. “In foreign relations, China remains firmly committed to pursuing an independent foreign policy of peace and is dedicated to promoting a human community with a shared future,” the communiqué stated. “Holding dear humanity's shared values, we will pursue the Global Development Initiative, the Global Security Initiative, and the Global Civilisation Initiative and call for an equal and orderly multipolar world and universally beneficial and inclusive economic globalisation,” it added.

The perspective comes at a time when China finds itself thrust into open economic conflict with the US. The most recent salvo has been the imposition of exorbitant tariffs on the import of Chinese electric vehicles into the US and Europe. Previously, Chinese 5G providers faced sudden restrictions as they were poised to secure lucrative contracts in the West. To restrict China’s advancement in artificial intelligence and hinder its chip industry, the US also imposed restrictions on the export of advanced chips and chip manufacturing equipment used in the production of semiconductors.