Xi vows to overhaul China’s finances, help indebted regions – BNN Bloomberg

(Bloomberg) — President Xi Jinping unveiled sweeping plans to shore up the finances of China’s indebted local governments, and the ruling Communist Party announced a long-term plan for the world’s second-largest economy.

China’s top leader outlined measures to address the debt crisis facing regional governments in a nearly 22,200-character resolution published by the official Xinhua news agency on Sunday. The plans focused on shifting more revenue from central to local coffers, for example by allowing regional governments to receive a larger share of consumption taxes.

Xi’s proposals amount to the “third major tax and fiscal reform” in recent history, said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. He cited a 1994 move to increase the central government’s share of revenue relative to regional governments and a series of decisions in 2013 that allowed local governments to issue bonds on their own as other major changes.

“The central government’s revenue was set too high and is now being adjusted,” Ding said of the framework set by then-President Jiang Zemin. The changes “will ease the imbalance between central and local government spending and revenue,” he added.

Xi chaired the twice-decade gathering in Beijing this month, where some 400 senior officials endorsed his vision of advanced manufacturing to power China’s $17 trillion economy. The gathering’s resolution signaled that while the supreme leader is refining risk management policies, there are no major changes to his overarching plans.

Chinese policymakers are under pressure to resolve a 66 trillion yuan ($9.1 trillion) hidden debt crisis and restore economic balance, as foreign leaders accuse Beijing of using exports to offset weak demand at home. Transferring a larger share of consumption taxes to regions could address both concerns by encouraging officials to boost consumer spending and offering them a new funding stream.

But imposing additional taxes on goods risks further dampening sentiment among Chinese consumers, who are already reluctant to spend as a housing price collapse hits their main source of wealth. Retail sales rose last month at their slowest pace since December 2022, as Chinese second-quarter growth data fell short of expectations.

Officials also pledged to give city governments more autonomy to regulate local housing markets, in line with policies over the past two years that have helped localities better contain the housing crisis. They also promised to build more subsidized housing and reform a pre-sale model that has led to developers being unable to deliver millions of homes that residents have already paid for.

China’s most powerful leader since Mao Zedong said in a separate statement that national security had been given a “more prominent” place by the four-day gathering, suggesting its superiority over the economy. But the official resolution said Beijing would seek to “achieve positive interaction” between development and security.

Officials also signaled a potential expansion of Beijing’s surveillance architecture, promising to “explore and establish a national unified population management mechanism,” the first use of that phrase by senior leaders.

“Xi’s emphasis on security shows that the goal of this development is ultimately to safeguard national security,” said Alfred Wu, an assistant professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore.

He added that investors may conclude that their hopes for the Third Plenum were too high, as the report mostly “spreads” vague information rather than signaling concrete changes.

Markets reacted weakly to a lack of policy signals in the first statement released after the meeting ended on Thursday. More detailed policies could be unveiled later this month at a meeting of the 24-member Politburo, which focuses on economic policy for the year, in July.

Xi last used the Third Plenum to outline an economic reform plan in 2013, as investors waited for the new president’s long-term vision to become clear. Since then, the supreme leader has consolidated power in an unprecedented third term and has delivered a clear vision of weaning the country off boom-bust debt cycles, reflected in a resolution that continued his long-term vision.

The report emphasizes promoting “high-quality development” — a vague slogan that is usually interpreted as emphasizing the quality of economic growth over its absolute pace. It focuses on Xi’s ambition to propel China’s economy by moving up the value chain through technological innovation.

China will also pursue “revolutionary breakthroughs in technology,” top leaders said, promising to improve policies for emerging sectors including artificial intelligence, new materials and quantum technology. The nation also pledged to develop more controlled supply chains for areas including integrated circuits and advanced materials.

The development of chips and AI is central to Beijing’s broader vision of replacing technology from the United States, which is increasingly trying to fence off China. Economists have listed technological self-sufficiency as one of the three most important economic issues that China’s leaders face in the medium to long term.

“I believe the Third Plenum did not change the government’s policy goals,” said Zhiwei Zhang, president and chief economist of Pinpoint Asset Management, “but introduced new measures to achieve those goals.”

–With assistance from James Mayger, Yujing Liu, Lucille Liu, Josh Xiao, Tian Ying, Alan Wong, and Jessica Sui.

(Updates with details.)