Yang Yao

Opinion | China’s third plenum shows its reform era has entered a new phase

As China strives to build a ‘high-level socialist market economy’, expect the central government to build on the reforms of past decades

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People riding bicycles and electric scooters wait at a traffic light in Beijing, on July 18 as the Communist Party of China’s third plenum draws to a close. Photo: EPA-EFE

Yang Yao

Published: 4:30pm, 13 Aug 2024

The Communist Party’s long-awaited third plenum seems to not have grabbed the expected amount of attention, both inside and outside China. One of the explanations is that the plenum failed to meet expectations for significant reforms. In particular, there were no announcements of any concrete measures to boost China’s low domestic consumption levels – widely acknowledged as a major problem for the country’s economy.

However, the third plenum is not oriented towards solving short-term problems. The third plenums of past party congresses put forward long-term strategies. This most recent third plenum was no exception. One of its significant achievements is that it lays out a plan for China in 2035 regarding its economic system. The key is the new goal of implementing a “high-level socialist market economy”. Several aspects of this goal are particularly significant for China’s policy agenda.

First of all, it implies that the primary stage of socialism, a concept formally proposed in 1987 to describe China’s early stage of development, is reaching its endpoint. As that stage comes to a close, so are the institutional arrangements that characterised the first part of China’s reform era.

China’s economic system is founded on the reforms carried out in the 1990s. With the unification of dual exchange rates in 1994, markets became the main tool to set prices. Many state-owned enterprises were either privatised or went bankrupt. Since then, privately managed businesses have consistently gained ground.

The conventional formula to describe the role of private businesses now is the so-called 56789: the private sector contributes 50 per cent of tax revenue, 60 per cent of gross domestic product, 70 per cent of innovations, 80 per cent of urban employment, and 90 per cent of registered businesses. The Chinese economy is no longer one that is dominated by state-owned enterprises but one that features a mixture of private and public ownership.

Other reforms were no less important, such as policies that replenished China’s financial system by successfully removing its non-performing loans. The tax reform of 1994 created a fiscal federal system that is believed to be one of the secrets for China’s economic success as it gave local officials strong incentives to grow local economies.