There has been much talk about China’s Third Plenum, and with good reason because China’s Third Plenum is one of most important meetings for Chinese economic and social policy. Deng Xiaoping, China’s paramount leader following the death of Mao, inaugurated the meetings in 1978 to implement economic reform within China, which effectively opened up China’s economy to increased foreign direct investment (FDI) and laid the foundation for China’s golden 30 years.
Not only is the Third Plenum considered a crucial moment for China because of its global economic impact, it is also the stage for China’s new 5th generation of leadership, Xi Jinping’s administration to unveil a new agenda for key political, economic, and social policies. These policies will effectively decide China’s growth trajectory over the next 5–10 years, which not only has an obvious impact on China but also the global economy. The Third Plenum comes as China faces unprecedented economic and social challenges from local government debt, shadow banking, and staggering GPD figures. The Chinese government is expected to take the opportunity to address all of these challenges and to plot the course for the coming years.
How will the Third Plenum affect Multinationals doing business in China?
The Third Plenum will certainly affect the competitive landscape within China. As part of the plenary process, the Chinese government will identify relationships between SOEs, private owned companies, and multinationals. Private enterprises are to obtain more freedom, but SOEs will still remain dominant players in the market. The Chinese government will also emphasize the role of market forces, albeit a double edged sword for multinationals. Allowing market forces to direct investment will give private domestic companies in China reduced barriers of entry and easier access to capital.
The Chinese government will also deregulate the price for energy which will affect the cost of doing business. Though this will increase the cost of doing business in short-term, the government will also enact interest rate liberalization leading to the lower borrowing cost for companies in the future. Any company currently doing business in China knows that government engagement is necessary, even if cumbersome. This will remain the case for MNCs since purchasing decisions will remain consolidated at the central level, including food, drug, healthcare, and construction. MCNs need to consider crafting a centralized government engagement strategy to navigate the political field.
The Plenum will also affect consumer bases, namely those in the early childhood sector can expect a large increase in the consumer base. After the relaxation of one child policy, urban families are allowed to have two children if one of the parents is an only child, which is expected to lead to 2–3 million new babies born each year. Baby-related consumer products, such as in food, diapers, infant milk powder, automotive, toy and clothing industry, will boom in the short term. However, since newly born babies won’t enter the workforce within the next 20 years and parents need to reduce working hours to care for additional babies, a smaller supply of workers will push up labor prices in the middle term.
Lastly, and certainly not least, foreign investors will see significantly lower regulation barriers. Mixed ownership structures will be allowed and investors will be encouraged to for private sector partnerships in key strategic industries. MNCs will enjoy the improved regulatory transparency and stability for foreign investments in the Shanghai Free Trade Zone. Unfortunately, China will also continue to intensify indigenous innovation, resulting in a “techno-nationalism” and promulgating China’s IP protection, or lack thereof. China is typically deemed one of the great economic powers of the 21st century, and it seems the Third Plenum is attempting to continue that trend. For further reading on China’s Third Plenum, Frontier Strategy Group clients can click here to access the full report.