Summary of the Economic Section of the Third Plenum and Highlights (TANAKA Osamu)
China's Fiscal Situation and Policy Issues: A Consideration of Fiscal Risk (NAITO Jiro)
Prospects for China’s medium- to long-term growth and the factors of its constraint (FUKUMOTO Tomoyuki)
The Governance Concept of the Xi Jinping Administration as Seen in the Restructuring of the Organization (KOJIMA Kazuko)
The US-China Relations and the “Internationalization” of the Taiwan Issue during the Xi Jinping Administration (MATSUMOTO Haruka)
The Chinese Economy and China's Foreign Policy: Focusing around the U.S.-China Relations (SEGUCHI Kiyoyuki)
China’s Industrial Policy and Economic Friction: An Evaluation from “Economic Analysis of Industrial Policy” (WATANABE Mariko)
| By TANAKA Osamu | (Senior Research Fellow of the Policy Research Institute (Special Adviser for China Research)) |
The Third Plenum of the Central Committee of the Communist Party of China (CPC), where the basic policy for economic policy for the third term of the Xi Jinping administration is decided, was held from July 15th to 18th 2024, which was a significant delay from the original schedule, and the “Decision of the Central Committee of the Communist Party of China on Further Deepening Reform and Promoting Chinese-style Modernization” (hereafter, referred to as “the Decision”) was announced on July 21st, where the details of economic system reform up to 2029 were set out.
Looking at the structure of the Decision, while the expansion of domestic demand is only briefly mentioned as a sub-item in Chapter 1 of the main text, supply-side structural reform is discussed in detail throughout Chapter 2, with the supply side afforded more weight than the demand side. Although the emphasis on supply is a basic policy of the current administration, the fact that domestic demand expansion is dealt with only briefly may give the impression both in the home country and abroad that “the current administration is not enthusiastic about expanding domestic demand”, such that it would be necessary to quickly come up with measures to expand domestic demand in the future.
“Development of new-quality productivity” has become the center of supply-side structural reform. This is mainly about developing strategic emerging industries and fostering future industries, and is also part of the US-China struggle for supremacy over cutting-edge industries. It will also be extremely important for Japan to follow these specific policies closely in the future and efficiently seize business chances and opportunities to further develop its own industries as they arise.
In the past, there has been an emphasis on coordination and collaboration in the areas of fiscal, financial, employment, industrial, regional, science and technology, and environmental protection policies, but now there are also required policies other than economic policies to be in line with the direction of macroeconomic policies. The National Development and Reform Commission will now carry out strict prior checks on the enactment of new policies that may constrain growth and undermine public expectations.
At present, the Chinese economy is facing three major risks: the real estate market in a downturn phase, increased local government debt, and deterioration of the business performance of small and medium-sized financial institutions. The Decision indicates in-depth reforms against the risk of local government debt and the risk of small and medium-sized banks, but regarding the risk of real estate, it only briefly mentions expanding local governments' discretionary powers and reforming the pre-sale of condominiums. Rather than leaving everything to the local governments, the central government needs to steadily support new policies for the real estate market and boldly review them as necessary.
Regarding the future of the Chinese economy, the confidence of private companies, foreign-affiliated companies and consumers is currently wavering, leading to economic stagnation, and how to raise their confidence is currently an important issue. However, the “Decision” lacks depth and power in its measures for the real estate market, private companies, foreign-affiliated companies and consumers, and it is necessary to quickly formulate and steadily implement policies for the development and expansion of the private economy, promotion of private investment, increase in personal income, stabilization of the real estate market and enterprises, promotion of consumption, expansion of capital investment, and protection of the rights and interests of foreign-affiliated enterprises and their employees.
Keywords: high-quality development, building a new framework for development, development of new-quality productivity, self-reliance and self-strengthening in science and technology, national security, Chinese-style modernization, development and expansion of the private economy, organic combination of implementing a strategy to expand domestic demand and deepening supply-side structural reform
| By NAITO Jiro | (Professor in the Faculty of Economics, Daito Bunka University) |
As the Chinese economy continues to stagnate, the direction of economic policy is becoming increasingly important. The tax and fiscal system and policy management are being questioned. With the property market still in turmoil, local government fiscal risk is also increasing significantly. Although the government has indicated that it will continue its "proactive fiscal policy" and is gradually implementing measures, it has not yet taken any drastic measures, and there are concerns about the cautious stance of the central government in particular. Measures are needed that can be supported by the relatively healthy fiscal positions of central government.
Under these circumstances, the 20th Third Plenum of the Central Committee of the Communist Party of China (hereinafter referred to as the 20th Third Plenum) put forward a plan to restructure local finances by adjusting intergovernmental financial relations and strengthening the transfer of some powers to local governments, which can be appreciated to some extent. However, the specific details are not necessarily clear, and there are concerns about how this plan will be achieved. It is essential that the reforms outlined in the Committee's “Decision” are implemented properly and promptly, and that future developments are closely monitored.
At the same time, the ongoing tussle between central and local government for a share of the pie continues, and issues such as expanding financial resources and thorough tax collection to increase revenues also need to be addressed. There are a number of issues surrounding the nation's finances, including the declining population and accelerating aging of society, the expansion of military spending and the increasing "Public sector advances, private sector retreat" under the top priority of "national security", as well as the inefficient management of economic policy due to contradictions. The Xi Jinping administration, which has concentrated power in the party and for himself, will be held accountable for the results of its actions. The future of fiscal reform and policy management will be closely watched.
Keywords: fiscal situation, fiscal policy, local government finance, fiscal risk
JEL Classification: H1, H6, H7, O2
| By SAITO Naoto | (Head of Economic Research, Economic Research Department, Daiwa Institute of Research Ltd.) |
At the time of writing this article at the end of September 2024, it has been four years since the introduction of the Chinese version of the total volume control system, and more than three years have passed since the China Evergrande Group management crisis occurred in the summer of 2021. China should have learned much from Japan's experience of the collapse of its real estate bubble, but it completely missed the most crucial timing of “early identification and radical disposal of non-performing loans”. It will not be easy to pull out of the real estate slump, and the best scenario for the future will be “contractive equilibrium,” where housing demand decreases and supply is controlled. This means that a decline in economic growth would be inevitable. If the real estate slump continues for a long time and becomes more serious, there will be concern that China might repeat the experience of Japan’s lost two (or three) decades.
Although China's debt-to-GDP ratio is extremely high, the relationship between state-owned companies and state-owned banks is close, and it is possible to postpone problems by means such as rollovers and refinancing. In this respect, the possibility of financial risk exploding can be said to be limited under normal circumstances. The factors that increase the probability of a financial crisis occurring in China or the economy stalling are a prolonged and worsening real estate downturn and the “Taiwan contingency.” In particular, the “Taiwan contingency” incurs a risk that could cause the economy to stall due to a sharp rise in domestic interest rates and a shrinkage in foreign trade, so those should be paid attention to.
Keywords: real estate downturn, Chinese version of total control, state-owned companies taking over private companies, local government financing vehicles, non-performing loans, financial risks, financial crisis, economic slowdown, Taiwan contingency, political risk
JEL Classification: A10, E21，E22，E43，E44，E50，E51，E52，E58，F51，G21，G28，G32，G33，G51，R31，R38
| By FUKUMOTO Tomoyuki | (Professor in the Faculty of Economics, Osaka University) |
Since the Covid-19 pandemic, China's economic growth has clearly slowed down. This paper examines four factors that constrain China's economic growth: demographics, government economic management and innovation, real estate and financial risks, and the US-China conflict and De-risking, and makes evaluations on these factors as follows.
(1) In terms of demographics, the decline in the main population of home purchasers will reduce demand for housing, and the aging of the population may be affecting personal consumption.
(2) In terms of economic management, the strengthening of government micro-management is likely to pose certain restrictions on corporate activity and innovation.
(3) The possibility that the real estate downturn will lead to financial crisis remains low.
(4) Although the US-China conflict has transformed the trade structure, global supply chain is far from decoupling. On the other hand, while there is a high possibility that China's technological catch-up will be delayed due to efforts to prevent China's rise in advanced technologies such as semiconductors, its rise in mature technology fields will continue.
Based on the above, the author has revised the basic scenario downwards for China's medium- to long-term growth set out by Fukumoto (2022).
Keywords: convergence theory, peak-China, medium- to long-term growth, demographics, household registration system, common prosperity, banking system, the US-China conflict, De-risking
JEL Classification: F40，G01，J11，J13，O12，O30，O40，R21, R31
| By KOJIMA Kazuko | (Professor in the Faculty of Law, Keio University) |
This paper interprets the governance concept of Xi Jinping’s administration through an analysis of governance system reform, and examines its challenges. The Xi administration is attempting to build a strong state through the thorough implementation of the rule of law, the strengthening of central authority in areas of national policy such as taxation and finance, and overcoming the roughness of the bureaucracy, while at the same time reducing the bloated bureaucracy and building a governance system suited to a market economy. In addition, in order to prevent discord within the administration that could be caused by painful reforms, and to prevent the overthrow of the system from inside and outside of the administration, he has placed his close confidants in key positions in the fields of propaganda, public security, and the military, and is implementing strong-arm rule.
In this way, the political management of the Xi administration shows a high level of purpose rationality and implementation ability, but there are also risks. The question of whether or not the government will be able to respond to the risks associated with the lack of a successor to Xi Jinping, the risks of disruptions to free policy debates and the use of specialist knowledge under authoritarian rule, and the difficulties of personnel management and the confusion within party and government organizations that will result from institutional reform will be a key issue in determining the success or failure of the governance reform.
Keywords:institutional reform, Xi Jinping
JEL Classification: Z（Other Special Topics）
| By MATSUMOTO Haruka | (Senior Research Fellow, IDE-JETRO) |
This paper focuses on the US-China relations and the Taiwan issue during the Xi Jinping administration. Xi Jinping’s administration has entered an unprecedented third term in office, and while strengthening its influence both domestically and internationally, it has continued to centralize power. In particular, the author examines the impact on US-China relations and the international community, influenced by the divergent approaches taken by the United States and China in response to the Covid-19 pandemic. China's aggressive reaction to the visit of US House Speaker Nancy Pelosi to Taiwan in August 2022, and its impact on security in East Asia, will also be discussed. Furthermore, this paper will clarify the increase in military tensions in the Taiwan Strait, China's “gray zone strategy” and the risk of a Taiwan contingency, with the Taiwanese presidential election in January 2024 at its core. Finally, while the concurrent issues of Xi Jinping’s “one-man rule” and the intensifying US-China conflict continue, this paper will explore the future of cross-strait relations in light of a series of incidents around the Kinmen Islands, and discuss the importance of strengthening deterrence through Japan-US cooperation. As the “internationalization” of the Taiwan issue progresses, this paper will emphasize the importance of efforts aimed at maintaining regional stability.
Keywords: US-China relations, Taiwan issue, Xi Jinping administration, Taiwan contingency, East Asian security
JEL Classification: F5
| By SEGUCHI Kiyoyuki | (Research Director, The Canon Institute for Global Studies) |
There are two theories regarding the correlation between domestic and foreign policies. One is that when a country faces difficulties in its domestic affairs, it adopts an aggressive stance in its foreign policy. The other is that it adopts a conciliatory stance. In order to confirm the actual correlation in the Chinese government's foreign policy, this paper conducted a demonstration analysis focusing on the relationship between domestic affairs, around the management of domestic economic policy and foreign policy, mainly towards the U.S. and EU.
If we focus on China's foreign policy from around 2010 and after, we can see that when the economy is stagnant and public confidence in the economy is low, China's foreign policy tends to be conciliatory, particularly in its relations with the United States. Conversely, when the domestic economy is in good shape and public confidence is high, China adopts an aggressive stance in its foreign policy. However, there is little correlation between China's foreign policy towards middle power countries such as Japan, South Korea, India and Australia, or smaller countries, and the domestic political situation in China.
The Chinese economy is currently in its worst condition since 1990, and there is no sign of a recovery in corporate or individual confidence. The reasons behind this would be considered as the end of the era of rapid economic growth, the serious stagnation of the real estate market, and concerns about the ability of the new administration to manage economic policy after 2022. As it is unlikely that there will be any significant changes in these factors in the next two to three years, it is thought that China's foreign policy towards the U.S. and EU will continue to be conciliatory for the time being.
Keywords: China's foreign policy, Chinese economy, US-China relations, confidence, Purchasing Managers' Index (PMI), US-China conflict, economic security, decoupling
| By WATANABE Mariko | (Professor, Faculty of Economics, Gakushuin University) |
The ongoing economic friction between the United States and China stems primarily from conflicting industrial policies. A useful perspective for understanding this conflict can be drawn from the economic analysis of Japan's industrial policy, as developed by Komiya, Okuno, and Suzumura (1984). Their work articulates two essential frameworks: the “logic of industrial development,” which justifies the use of industrial policy to foster technological innovation and growth, and the “logic of economic friction,” which highlights how these policies, when extended into the global trade and investment system, can lead to “international market failures.”
The “logic of industrial development” posits that fostering technological advancements at reduced costs is desirable. However, this pursuit can result in competitive subsidy races and the creation of industrial linkages at significant scale. Such conditions raise the risk that a single country may monopolize the benefits associated with economies of scale, thereby distorting international markets. Komiya and his co-authors further argue that “developmentalism” – the strategic use of industrial policy to attract investments in industries with significant scale economies – underpins much of the economic friction between nations.
Since this seminal work, research on industrial policy has stagnated, and today, the focus remains almost exclusively on the logic of industrial development, neglecting the potential for market failure outlined by the logic of economic friction. China’s industrial policy initially drew inspiration from Japan's approach, yet it has since evolved to emphasize a refined form of “developmentalism” with little regard for the risks of international market failure. The Chinese government, even after the Third Plenum held in July 2024, continues to prioritize the logic of industrial development, demonstrating limited awareness of the need to address the adverse outcomes identified in the logic of economic friction.
To mitigate the risk of international market failure, there is a growing need for the establishment of international agreements or rules. Enhanced international cooperation will be essential to reconcile the competing logics of industrial policy and ensure a more stable global economic environment.
Keywords:industrial policy, economies of scale, China, Japan, economic conflict, dynamic comparative advantage
JEL Classification: F12，F13，L5，L6，L9，O12，Q12，L22，O13
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