Chinese Leaders Are Gathering for Policy Talks. How the ‘Third Plenum’ Just Might Lift Stocks.
July 14, 2024 2:30 am EDT
Markets tend to do better when expectations are low. And they are at rock bottom as the most senior leaders of China’s Communist Party meet t his week to hash out long-term policy at the Third Plenum.
Questions about China’s longer-term trajectory are only growing given the challenges it faces. The property market, the previous engine for economic growth, is fundamentally hobbled; consumer and business confidence is in the dumps; and increasing protectionism in the West threatens the nation’s export machine.
Investors have been scarred by a series of disappointments and a lack of follow-through on efforts to overhaul the economy, so they don’t expect much to result from the meetings, which run from Monday through Thursday. That leaves the bar so low that nuanced shifts in rhetoric from leaders, or indications that needed structural overhauls are coming, could nudge the market out of its current rut.
It is a deep one. The MSCI China index has lost $2 trillion since its peak in February 2021. Each effort to retrace even some of those losses has fizzled: Even a 30% rally from late January to mid May lost steam as policymakers didn’t deliver more significant measures to revive confidence among consumers and in the private sector, or to stabilize the property market.
The Third Plenum, which happens every five years, is unlikely to be a turning point for the market. It isn’t a forum for near-term changes in macroeconomic policy. Those are more likely to happen at a meeting of the Politburo meeting expected at the end of the month. Instead, the Plenum usually offers a blueprint for broad, longer-term overhauls.
While recent Third Plenums under Chinese leader Xi Jinping have featured tighter party control over the economy and policymaking, the meetings this year are expected to further the economic agenda Xi has laid out over the past couple of years. Observers expect increased talk of investing in technology and green energy, upgrading China’s industrial base, boosting China’s self-reliance as it faces geopolitical pressures, and addressing other vulnerabilities, such as corruption within the ranks of the People’s Liberation Army.
“The signals going in are reform and modernization, but the preparatory moves also focus on battening down the hatches for what they believe is a coming storm—a reason they are trying to get their internal house in order this year,” says Rick Waters, the managing director of Eurasia Group’s China practice. He was formerly the State Department’s top China policy expert.
What has come out of past Plenums has often followed a trajectory laid out in comments by officials and state media prior to the gatherings. Given that, some strategists see the potential for changes that could over time help spur consumption, aid the property market, and support Chinese companies in tapping demand abroad. There could be enough of such seeds, insignificant at first but potentially important, to get the market moving toward another attempt at a recovery.
“There will be no course correction, but the Party machine has been raising expectations of ‘deeper’ and ‘accelerated’ reforms, says Rory Green, head of China research for TS Lombard. “We are cautiously optimistic that positive structural reform will start at the Plenum.”
Two shifts that could help over the longer term include overhauls related to urbanization that allow for increased access to social services for migrants moving to bigger cities, and steps to deal with the debt burdens constraining local governments, says Michael Hirson, 22V Research’s head of China research.
People who move to larger cities haven’t been able to access social services, in part because local governments in some provinces are too financially constrained. Strong language from leadership calling on local governments to eliminate the urban-rural distinction for services, or signals that the central government may help local governments pay for what migrants need, could trigger increased consumption and even property purchases, Hirson says.
For Andy Rothman, investment strategist at Matthews Asia, one thing that could improve sentiment among investors is any change in rhetoric among leadership that reassures private companies still rattled by Beijing’s haphazard policy crackdowns on the internet platform companies. Wariness among private employers is a broader challenge for the economy: They account for 90% of urban employment and can fuel hiring and investment that could also lift consumer confidence.
Rothman points to comments in 1984 from former Chinese leader Deng Xiaoping’s that jump-started economic reforms and remarks in 1992 that helped to revive the private sector after years of economic weakness, including high unemployment. “He was able to persuade a large number of people that the party and government weren’t going to get in their way if they invested in their own businesses and hired people,” Rothman says. “That’s the kind of thing that must happen again.”
That may be too much to expect, especially because China’s economy, while not booming, isn’t falling off a cliff either. Policymakers have at least put a floor under growth with a steady drip of incremental stimulus measures. While still troubled, the property market strengthened in the second quarter, with home sales and pricing improving, according to data from the independent research firm China Beige Book.
Investors should plan for a week of reading between the lines and keeping score to see if enough incremental developments emerge for the market to make another stab at a recovery.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
