Letter To Shanghai No 1169 - Limited expectations

The Third Plenum started in Beijing this morning to a fanfare of poor and mediocre data. According to today's GDP release "The Chinese economy expanded 4.7% yoy in Q2, missing market forecasts of 5.1% and slowing from a 5.3% growth in Q1. It was the weakest yearly advance since Q1 of 2023, amid a persistent property downturn, weak domestic demand, a falling yuan, and trade frictions with the West." Which I think is suitably clear-eyed. Historically, the Third Plenum has been central in introducing key long-term policy shifts and economic reforms. However, western media is already asking if Beijing will announce suitable growth-positive measures to revive the increasingly reluctant Chinese consumer.

Maybe yes, maybe no. So far, we don't know, and, most probably, it doesn't matter. This meeting turns on politics and, having the right interpretation of the current situation, it does not have to deliver any solutions except to unify the top management around the current diagnosis.

The aim of this Plenum is to adjust the road map to reach a series of previously agreed industrial and technological goals by 2035 so that China becomes a technology superpower and has a world-class military by 2049. In fact, Plenums are for turning the tide of history (and what could be more important than that?) and not necessarily to micro-manage the current headwinds. Therefore, it is natural that one should fall back on long-agreed guiding principles. ?This morning (Monday), President Xi delivered the Politburo's work report to the 370 delegates and a further draft document on the Central Committee's position on "further comprehensively deepening reform and advancing Chinese modernisation". Which, as you know, has been the signature policy of President Xi as long as he has been in power and of others before him.

So while the Plenum will define the direction of strategy, the actual policy changes, the changes to the levers of economic control, may wait until the Politburo meeting in July or beyond. Indeed, the Politburo may wait until it sees the Fed?cut rates, not wanting to weaken the RMB any further before then.

As the Plenum closes on Thursday, we may look forward to a brief communique summarising the key decisions. This may then be followed a few days later by a comprehensive document outlining the agreed decisions in full, which no doubt will be found in the People's Daily. Somehow, I doubt its contents will support the West's?expectations.?

Have a good day,

John