China released the details of the Third Plenary Session over the weekend. “Reform and opening up” remained the key themes of the session. Key areas under close watch include new strategic industries, factor market reform, aging population, fiscal reform, capital and financial market reform, and property market reform. The authorities also emphasized the importance of the Hong Kong SAR. (See: official full text (English version))

1.  Policy priorities – new strategic industries

One important discussion topic was advancing the cultivation of "new strategic industries" - a concept defined by President Xi to refer to strategic emerging sectors vital for powering innovation-driven growth. Amongst all, AI and chips (see: China: 2Q GDP weakens & Third Plenum outlook) are the sectors in watch. According to IDC, China’s AI related hardware, software, and services markets are expected to grow by 15.1%, 32.0%, and 28.5% in 2021-2026.

Through resolute efforts to develop these new forces and accompanying economic reforms, Beijing aims to demonstrate its resolve to minimize vulnerabilities arising from geopolitical tensions as some foreign companies recalibrate supply chain allocations away from China. Further investment into human resources is required for developing “the new quality productive forces”.

2.  Policy priorities – aging population and retirement protection

Birth rate of China has been falling since the removal of one-child policy in 2017. Aging population could be an obstacle towards the goal of achieving middle-class society by 2035. Revitalizing the silver job market is one of the ways out. There could be a potential delay of statutory retirement age. Note that the statutory retirement ages of China are 60-year-old for men and 50-year-old for women respectively, far lower than then other Asian economies such as Japan (aged 65-70) and Hong Kong (workers aged 65 are entitled to collect pension). That of major economies such as France and Spain are also set at 65. There will be further enhancement on pension contribution from business sector / the state to attract the elderlies to return to workforce.

3.  Policy priorities – fiscal reform

The authorities addressed long-standing budgetary imbalances between central and local administrations. As for 3Q23, the central government debt-to-GDP ratio, at 23%, remained much lower than that 82% of general government debt.

The detailed resolution included promoting the division of consumption tax revenue with local governments. In 2023, consumption tax revenue reached RMB 1.61 trillion, accounting for 8.1% of national tax revenue. These reforms could empower local administrations to retain more major tax receipts, thereby stabilizing budgets in a more sustainable fiscal manner.

The budget deficit of local government is stressed by the weak land sales.  By splitting consumption tax revenue equally between local and central governments, it is anticipated that local government fiscal revenue will increase by RMB800bn a year, compensating for the decline in land sales receipts.

4.  Policy priorities – capital and financial market reforms

In addition to improving connectivity with foreign capital markets, regulators will unify existing market access and settlement systems. The authorities are exploring establishing inclusive institutional arrangements compatible with a multi-level custody system. This will enable overseas institutional investors to entrust qualified local custodians for bond custody directly, or through their global custodians in the future. Regulators will likely make enhancements to the “National Nine Rules” to improve corporate governance among listed companies.

5.  Policy priorities – property market reform

The property market was mentioned in the communique as a key risk. In our view, the authorities will gear up rural-urban development (urbanization) to aid inventory destocking. Enhancing the household registration system is key. Migrant workers will be entitled to access more social welfare and home buying in cities. Infrastructure connecting rural and urban areas is another enabler. Other measures include reforming funding channels to improve developer liquidity. On the pre-sales model, the authorities may encourage developers to sell completed projects instead of those under construction. This could help build a new real estate development model over the long term. The authorities will establish a coordination mechanism to allocate land quotas based on population demand. This could help ease excess land supply in 3rd-4th tier cities.

6. Hong Kong – International financial, shipping and trade centers

Hong Kong was mentioned three times in the announcement. First, promoting the Greater Bay Area to better play its role as a high-quality development powerhouse; second, consolidating Hong Kong's status as an international financial, shipping, and trade center; and third, supporting Hong Kong to build a high-quality talent pool and better fulfil its role in opening up to the world.

Under this blueprint, Hong Kong will continue to serve as a key location for China’s outward direct investment, with 80% of Guangdong’s and 60% of China’s FDI flowing through Hong Kong. Combined with the Shenzhen Stock Exchange, the Greater Bay Area is the world’s top IPO destination. Hong Kong International Airport, one of the busiest airports in terms of air cargo, forms a shipping and trade cluster with world-class ports in the Greater Bay Area. Hong Kong, which settles over 70% of the offshore RMB settlement, will continue to help facilitate China’s cross-border payment. The PBOC and HKMA will continue to work on the cross-border CBDC (e-CNY/e-HKD) development to facilitate the growth of wholesale digital currencies.

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