More on 3rd Plenum, Politburo meeting, Italy, the Philippines, India - Week in Review #23

Hi folks, after 2 essays about the 3rd Plenum and one about my own evolution and changing understanding of the Western media, it’s been almost a month since the last time I did a proper weekly review. Without much ado, let me dive in right away.

#1 One last word about the 3rd Plenum

I did an AMA live session for Baiguan subscribers this week, and during the subsequent discussion in Baiguan’s Discord community, it dawned on me that many people still haven’t really connected the dots and seen the big picture of how much the 3rd Plenum is really about the demand-side reform.

I will try one last time, by showing an exchange of Q&As (in modified form) from Baiguan’s Discord community:

Member: I read on your previous article that there was a line in the Decision, talking about expanding coverage of free education. Wasn’t compulsory education made free in 2017? Or was it not national coverage?

Me: This implies they will include more under free coverage, such as high school and pre-school. Some regions in China are already testing free tuition for high schools. I don't know if you read Chinese but here is one of the news.

Me: By now, I have said it many times that by shifting taxes from production side to consumption side, and by letting local governments tapping into consumption tax, more and more local governments will be encouraged to support this kind of social services in order to boost demand and to boost consumption.

Member: For the link you provided, it looks like program is coming from local provincial support, but not from central government? Also, to get this benefit, current Huko rigid system limit applies, right? So if the 3rd plenum Huko reform gets implemented, then the free high school tuition will open up for many others as well?

Member: I’m starting to get the picture you’re painting.

Me: First of all, at the time of the news I just shared, it’s more like local experimentation, pre-3rd Plenum, before local government even get a cut of revenue out of consumption. Those experimenting local governments just wanted to subsidize high school education for whatever smaller incentives they might have at the time. And yes, it happened before the Hukou system can become more fluid.

Me: Now, the central government is basically coming out and says: let’s give you the local government more revenues. You will get the consumption tax based on the actual consumption by residents living in your areas. We will also make sure the residents who actually live in your areas enjoy all the social services. Finally, the aggregated result from all of the above will be = local government now has a core incentive to invest in social services to attract as many residents as possible and to make those residents willing to spend as much as possible.

Me: It’s indeed one holistic plan, with interconnected parts but unfortuantely dispersed throughout that Decision. It’s understandable that many observers will question whether this Decision actually mean anything, because just as our good friend Bob Chen pointed out, there is no “priority” and “focus” explained in the document, for whatever reasons.

Member: Well, it’s rather dispersed and fortunately with you explaining to me patiently connecting the dots, it vastly shortened my time to get what they’re trying to accomplish.

Me: Glad to be of help! We hope this community can be a place where any one of your China-related questions can be answered as best and as honestly as possible.

Overall, I think this is a major paradigm shift, connecting fiscal reform, residency reform, tax reform, and social security reform into a holistic, demand-side reform package, whose real impact in the next decade has not been reflected in the lack of enthusiasm today.

Hutong Research has just made an excellent infographic echoing my views as well:

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#2 Politburo meeting

In the first Politburo meeting after the 3 Plenum, I see the leadership has sounded two correct notes.

[The rest of the article is reserved for paying subscribers. I will comment on the positive developments and remaining uncertainties of this week’s Politburo meeting, the visit by Italy’s Meloni and what it means for the Belt and Road Initiative, and new encouraging developments about managing border disputes between China and our neighbors such as the Philippines and India, and China’s overall attitude on border issues and regional peace. Please subscribe or subscribe at Baiguan in order to access this article.]