The recently concluded Third Plenum of the 20th Central Committee of the Chinese Communist Party (CCP) discussed the theme of "deepening reforms comprehensively", made judgments on the current situation, and arranged macro-policy for the near future. According to the communique of the session, it analyzed the current situation and tasks, "emphasizing steadfastly achieving the annual economic and social development goals", indicating confidence in achieving this year's targets. Han Wenxiu, deputy director at CCP's Central Committee Office for Financial and Economic Affairs, stated that major macroeconomic indicators align with expectations. He also emphasized current difficulties, mainly insufficient effective demand, operational challenges for some enterprises, and fiscal difficulties in some regions, indicating that China's economic recovery is not sufficiently robust, with differentiation among regions, industries, and enterprises. Han remarked that the next step is to promote sustained economic recovery and achieve more balanced, inclusive, and broad-based development, relying on strong policies and vigorous reforms.
On the one hand, although the current economic situation of the country has slowed down somewhat, it remains within the expected growth range overall. On the other hand, as mentioned by Han, structural differentiation is quite severe in the context of insufficient demand. The issue of imbalance between demand and supply is the root cause of the current insufficient economic recovery momentum. Against this background, researchers at ANBOUND believe that although the Third Plenum has assigned many tasks for reforming the macro-policy system, the overall tone of macro-policy in the second half of the year will still be within the "moderately loose", gearing toward stability.
The Third Plenum outlined reforms related to the macroeconomic policy system, noted the necessity to improve the macroeconomic regulation system, coordinate the reform of key areas such as finance and taxation, and enhance the consistency of macroeconomic policies. It stressed the need to improve the national strategic planning system and policy coordination mechanisms, deepen fiscal and tax system reforms, reform the financial system, and refine mechanisms for implementing regional coordinated development strategies.
In the resolution on further deepening reform comprehensively to advance Chinese modernization adopted by the Third Plenum, it is mentioned that efforts will focus on coordinating policies such as fiscal, monetary, industrial, price, and employment policies around the implementation of national development plans and major strategies. This aims to optimize the allocation of various types of resources and adjust the structure of existing resources. It proposes exploring the implementation of a national macro balance sheet management system and assessing the consistency of economic and non-economic policies within the macroeconomic policy framework. The resolution also advocates strengthening the mechanism for expectation management and enhancing statistical accounting systems to support high-quality development, including coverage of new economic sectors.
According to ANBOUND's founder Kung Chan, the emphasis on "systematic," "coordinated," and "integrated" approaches is aimed at addressing the problem of conflicting policies. This suggests that China's future macroeconomic policies will focus on enhancing synergy and coordination among policies to unleash policy dividends while maintaining the overall tone of "seeking progress while maintaining stability".
Researchers at ANBOUND also pointed out that the concept of consistency in macroeconomic policy carries additional meaning. In the absence of major macroeconomic fluctuations, policies will be maintained with continuity and stability to prevent abrupt shifts. The People's Bank of China (PBoC) has clearly noted this approach while interpreting the ideals of the Third Plenum, mentioning the objectives include promoting high-quality financial development and accelerating the creation of a strong financial nation, offering a forward-looking and systematic design for financial system reform. Regarding monetary policy, the central bank has emphasized maintaining its prudence, expanding the monetary policy toolbox, improving the transmission mechanism, and enhancing fund efficiency to foster a supportive monetary and financial environment for sustained economic recovery and high-quality growth. Despite potential short-term reductions in the reserve requirement ratio and interest rates, the PBoC's prudent monetary policy is expected to be a long-term stance.
Additionally, the communiqué mentioned that the plenum emphasized the need to balance development and security. It called for implementing measures to mitigate risks in key areas such as real estate, local government debt, and small and medium-sized financial institutions. It also stressed strict enforcement of safety production responsibilities, improving monitoring and prevention measures for natural disasters, especially floods, and strengthening the social safety risk prevention network to ensure social stability. The session highlighted the importance of guiding public opinion effectively to prevent and resolve ideological risks and manage external risks and challenges. At the same time, it urged the country's leadership to make proactive efforts to shape a favorable external environment. In essence, these points stress "risk prevention".
As researchers from ANBOUND have noted, the real policy goal should be "improvement". However, even in the pursuit of improvement, solutions must address what concerns supply and demand. Structural issues arising from economic system defects also continue to hinder economic development, which requires enhanced fiscal policies and further reforms in the system. While the plenum's decisions set goals for 2029, the resolution of related risks may extend over several years.
Although the Third Plenary Session has outlined ideas for reforming the macroeconomic policy system, it indicates that macroeconomic policy will generally maintain a prudent tone for the foreseeable future. The effectiveness of these policies will be influenced by adjustments within the broader macroeconomic framework. Future enhancements in economic vitality and recovery are expected to depend more on changes to the monetary policy system and, more urgently, on fiscal reforms. Furthermore, structural adjustments are needed to address supply-side issues, while measures on the demand side should ensure overall demand stability.
For the second half of the year, on one hand, China's monetary policy will continue to adhere to a "prudent" tone, providing a stable monetary environment through moderate easing to support fiscal and structural policies. On the other hand, its fiscal policy will play a leading role as the pace of government debt issuance accelerates. At the same time, fiscal and tax system reforms are becoming increasingly urgent due to rising fiscal pressures. Between "risk prevention" and "growth stabilization", the space for fiscal policy to truly "gain strength" depends on the implementation of new fiscal solutions. Researchers at ANBOUND believe this will still rely on mechanisms like issuing special government bonds to achieve the desired fiscal outcomes.
Final analysis conclusion:
While China's Third Plenum proposed reforms and adjustments to the macroeconomic policy system, it also emphasized the importance of policy consistency. This means that macroeconomic policy will maintain a prudent tone for an extended period, balancing between "risk prevention" and "growth stabilization". At the same time, reforms and adjustments to the macroeconomic policy system would require a stable policy tone to be effectively implemented.
______________
Hongxu Wei is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.
