China’s long blueprint for economy falls short on details, raising concerns
Summary
The leadership in Beijing signaled commitment to short-term growth, but questions on long-term debt and property problems remain.
HONG KONG—Chinese leader Xi Jinping and other top Communist Party officials used 22,000 characters in laying out a blueprint for reviving the country’s flagging economy in the coming years and signaling an intention to rev up growth in the coming months.
On some of the thorniest issues, however, the document had little new to say—fueling concern among some economists about the country’s longer-term prospects.
The world’s second-largest economy, which saw growth slip markedly in the second quarter, is straining under the weight of $7 trillion to $11 trillion in hidden local government debt. It is also struggling to contend with a prolonged property crisis.
Anticipation was high among economists that Beijing would unveil plans for tackling those problems after party leaders gave a rare nod to both in a communiqué issued Thursday at the conclusion of the Third Plenum, a major policy meeting in Beijing intended to set economic and other policy priorities for the next half decade.
But those details were missing from the full blueprint, published by state media on Sunday.
“Waiting for the details on the actual reforms that China’s leadership commits to implementing from this Third Plenum, the first impression is that the above measures will probably not be enough to solve China’s economic woes," said Alicia García-Herrero, chief economist for Asia-Pacific at investment bank Natixis.
A major area of focus ahead of the plenum was the country’s consumption tax system, which some economists say contributed to the local debt crisis and the country’s struggle to stimulate consumption.
For decades, Beijing has controlled the national purse strings by taking over a large chunk of the local governments’ tax income. It also caps how much local governments can borrow. Yet at the same time, cities are expected to kick-start economic growth and provide services with limited budgets.
Currently, Chinese local governments turn over 100% of consumption tax income to the central government, giving them little incentive to boost consumption locally. In 2023, consumption tax income nationally was about $220 billion.
Earlier this month, economists at Citi called for the central government to gradually cut its share of consumption tax revenue by as much as 70% to send the proper signal to local governments.
China’s central and local governments split revenue from value-added taxes and corporate income taxes, giving local officials incentive to boost investment and manufacturing—areas where China’s economy is already overheated.
In the plenum blueprint, policymakers vowed to increase local governments’ financial resources, expand their sources of tax income and “gradually allow local governments to retain more consumption tax," but didn’t say how.
The wording on consumption tax was first used in a 2019 document and then repeated in the existing five-year plan released in 2021.
The plan was similarly vague on fixes for the property crisis, which was brought on in part by developers’ overreliance on proceeds from sales of unfinished apartments as a source of funding.
Money from so-called presales was supposed to go into escrow accounts to pay for the construction, but many developers withdrew cash before they completed the buildings. Local governments, which relied heavily on property-related tax revenues, were loose with issuing permits to developers to start selling homes. The result was a sector with some 20 million unfinished housing units scattered across China.
Cleaning those up is crucial for a recovery in the property sector, economists have said. The plenum blueprint vowed to overhaul financing and the presale system, but didn’t say in what way.
One specific promise officials did make coming out of the plenum was to stick with the government’s 5% growth target for this year, which some economists have said could be hard to reach.
At least one regulator is already taking action: The People’s Bank of China delivered a series of surprise but small cuts to several benchmark and policy rates on Monday morning. They included a 10-basis point cut to both 1-year and 5-year loan prime rates.
The central bank said it wanted to “step up financial support for the real economy." Analysts said the cuts showed a sense of urgency to shore up growth, especially after the economy slowed sharply in the second quarter.
Response was muted in the Chinese stock market. The benchmark CSI 300 index closed down 0.7%.
Write to Rebecca Feng at rebecca.feng@wsj.com
