On July 18, the four-day Third Plenary Session concluded.
Overall, the disclosed information did not exceed our expectations and did not provide direct answers to the challenges facing current economic development. Although the documents from the Third Plenary Session primarily address domestic development issues and coordinate the interests of various domestic stakeholders, it is evident that the international landscape has fundamentally changed. The United States is highly likely to adopt an economic policy mode characterized by high tariffs and low interest rates.
For China over the next five years, significantly increasing capital gains and progressive corporate tax rates now appears unrealistic. International trade related to green economy sectors such as automobiles and photovoltaics will face greater pressure.
From the perspective of domestic reforms, tax reform may focus more on the relationship between central and local governments. The current direction is to increase central authority while enhancing local financial powers. Intuitively, this might mean that most central government funds will be allocated to social policies, with relatively less emphasis on infrastructure.
The much-debated consumption tax reform has yet to be released, and specific information will only be available after the full text is published next week. Given the international environment and domestic economic cycle, an increase in tax rates seems a low-probability event. Real estate taxes are also unlikely to be introduced in the short term, with the direction of fiscal and tax reforms focusing more on the central-local relationship.
Compared to the 20th Party Congress, where common prosperity was prioritized after development, this plenary session’s description of Chinese-style modernization does not mention common prosperity. Instead, new terminology such as “improving the income distribution system” is used. Additionally, the large-scale population modernization was not specifically mentioned. From these aspects, it appears that the primary goal of this Third Plenary Session is to revive economic growth rates. Potentially restrictive reform measures have been collectively postponed, with the target completion date set for 2029 as a consideration.
Since the overall tax rate system will not change, the main issue remains the central-local relationship. This is also crucial in the reform of “implementing a system of providing basic public services based on permanent residence registration.”
Basic public services typically include education, healthcare, unemployment benefits, pension insurance, and retirement benefits. Nationwide coordination of healthcare accounts is already in progress. The provision of public services like education, employment, retirement, and elder care is tied to fiscal revenues. Since these services are not market-driven, their supply is inflexible.
If basic public services are to be coordinated based on permanent residence registration, it might require central government coordination of corresponding funds nationwide. Since these funds are not in the form of taxes but rather as funds, the financial account aspect is not overly challenging. The main issue is that public services do not have a price, and population mobility could affect the coordination of funds. Nonetheless, this reform measure could be critical for addressing core issues such as urban-rural integration and population dynamics.
Notable Points from the Press Conference
Two other significant points were made regarding private enterprises and foreign-funded enterprises.
For private enterprises, the communiqué states: “Improve the long-term mechanism for private enterprises to participate in national major project construction, support capable private enterprises in leading national major technological research tasks, and standardize administrative inspections involving private enterprises. The rule of law is the best business environment, and a law to promote the private economy should be formulated.” This indicates that the document focuses on the function of enterprises rather than their ownership structure. This is a very positive signal and a highly market-oriented approach, emphasizing product competition over ownership issues. The law to promote the private economy could be a notable development in the next 1-2 years, with the most important aspect likely being how to limit government intervention in the economy.
For foreign-funded enterprises, the communiqué states: “We should support both domestic and foreign-funded enterprises equally, ensuring that foreign-funded enterprises receive national treatment in accessing resources, obtaining qualifications, setting standards, and government procurement.” We believe this will benefit foreign-funded enterprises, though it may pose some challenges to domestic enterprises.
Awaiting Detailed Content of the Formal Document
The key now lies in the specific content of the formal document.