Beijing can restore private sector confidence with another third plenary ‘magic touch’

The seemingly contradictory phrase was effectively a rejection of central planning in favour of pursuing a market economy. It removed the ideological barriers to shutting down loss-making state-owned enterprises and negotiating with developed countries to participate more broadly in the global economic order. It also opened the door for the country’s capitalists to join the Communist Party.

These two meetings proved so successful in engineering China’s economic ascent that hopes are once again high for similar magic to emerge from another third plenary session.

The country is in need of change more than any time since 1978, as it searches for new growth momentum in the face of a long list of challenges – including a slow post-pandemic economic recovery, high youth unemployment, unsustainable local government debt, a nationwide housing market downturn, rising tensions with major trade partners, and a plunging birth rate.

Beyond initiating important policy shifts, the 1978 and 1993 meetings are also remembered for their consensus building. Ideological debates were put on the back burner to focus on achieving pragmatic goals. The country was no longer being pulled apart by divergent political pursuits, and Chinese citizens were now able to get on the same page about what was considered important.

China is much richer than in 1978 and much more powerful than in 1993. But over the last couple of years, policy overreach and a slew of missteps have left investors scratching their heads about the country’s direction.

China’s private capital owners, for instance, were reminded three years ago that the country would have a “red and green light” system for investments, i.e. certain economic sectors or projects will not take their money. Many investors have reasonably taken a wait-and-see approach to avoid a “red light”, but there has been little follow-up, leaving people in the dark about where those lines are.

Weak investor and consumer confidence is an underlying problem for China’s economy, caused partly by a lack of trust that circumstances will improve in the future.

This is not helped by Beijing’s promise to treat the private sector “fairly”, as the division of “public ownership” and “non-public ownership” only emphasises that they are receiving different treatment. The idea that private capital is not trustworthy and profit-seeking must be checked by state power has been an overriding assumption of China’s economic policies in recent years.

Suppressing private capital and market forces, of course, will not help China fix its problems. It is the opposite of the traditional focus of China’s economic reform process: using deregulation and privatisation to unleash the country’s entrepreneurial spirit.

The third plenary will have a lot of important items on the agenda, from the fiscal relationship between central and local authorities to the improvement of the country’s fragmented welfare system. But it is also a good chance to fill in the trust gap that has emerged by removing the ideological labels put on private capital and its owners.