European experts expect economic measures, military personnel changes from China’s Third Plenary Session

Vienna — European experts watching China’s Third Plenum say this week’s high-level meetings are unlikely to touch on political reform but will likely introduce several measures to reverse the nation’s economic downturn.

“Any measures to be announced on China’s key economic problems will be moderate and gradual, like Chinese medicine, as opposed to a shock therapy,” said Alicia Garcia-Herrero, a senior researcher at the Belgian think tank Bruegel.

The Spanish economist listed eight key problems facing the current Chinese economy: stagnation in real estate; tight local government finances; deflationary pressure; sluggish consumer consumption; an aging population; a decline in foreign investment in non-manufacturing industries; increased social security costs, such as pensions and medical care; and the failure to achieve transformation and upgrading of the manufacturing industry.

The state-run Xinhua News Agency has said decisions on such matters are expected from this week’s Third Plenary Session of the 20th Central Committee of the Communist Party of China, which is to address policy matters spanning the next decade.

Garcia-Herrero said China’s possible approaches include providing modest subsidies to low- and middle-income households to stimulate consumption; structural measures to slow down the aging of the population; opening up investment access to attract foreign investment; increasing local government taxes to make up for shortfalls caused by falling land prices; delaying retirement; and reducing government administrative costs to achieve fiscal balance.

Chinese policymakers will need to make some hard choices. A lack of social benefits prompts people to save for future emergencies, which reduces private consumption. Stimulating consumption will require greater government spending, including a better social welfare system, but this will hurt an already deteriorating fiscal position.

It remains to be seen to what extent China’s economic decision-makers agree on establishing a social safety net and carrying out consumption-oriented structural reforms.

Garcia-Herrero said that in the long term, the way to solve China’s economic woes is to expand local fiscal autonomy and develop high-end manufacturing, although neither seems likely in the short term.

The plenum is expected to focus on reforming the fiscal and taxation systems, and specific measures may include transferring consumption tax and value-added tax from the central government to local governments.

President Xi Jinping has stressed the importance of vigorously developing “new quality productivity” and promoting China’s industrial upgrading and “high-quality development.”

Alexander Davey, an analyst at MERICS, told VOA, “The past reforms of investments of vast resources and personnel into modernizing China’s industrial system and promoting scientific and technological innovation will continue.”

But he said it is uncertain whether those investments “will negatively impact the extent to which Beijing can allocate resources for local governments to service health care, education, infrastructure, government employee wages, etc.”

Analysts say the Chinese modernization development model, which relies on high-end manufacturing exports to drive the economy, could exacerbate trade disputes between China and its major export destinations. The United States and Europe have recently accused China of “overcapacity” of electric vehicles and have imposed anti-dumping investigations and tariff measures.

Davey said Chinese-style modernization “could be used as pretext for how Beijing decides to retaliate [against] Brussels’ tariffs on Chinese EVs, among other EU de-risking actions towards China. Beijing may target European imports like brandy, wine, and certain types of cars, framing them as unnecessary luxury goods in its march towards common prosperity, imposing tariffs accordingly.”

The China watchers also said specific plans for personnel changes at the top level of the People’s Liberation Army are expected.

Two former Chinese defense ministers, Wei Fenghe and Li Shangfu, were expelled last month from the party and the military.

Francesco Sisci, an Italian Sinologist, told VOA, “We know the focus will be the PLA and the economy. The domestic economy is not doing well with private consumption shrinking and the military is under immense stress for the unprecedented purge of two ministers of defense. The PLA seems in disarray, which is extremely dangerous.”

Adrianna Zhang  contributed to this report.
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