This article is the 724th original article published by the Xijing Research Institute and the 683rd original article by Dr. Zhao Jian.

The Third Plenary Session is often a meeting that shifts the gears of national fortune. The Third Plenary Session of the 11th Central Committee rectified errors and ushered in the prelude to reform and opening up; the Third Plenary Session of the 14th Central Committee broke through numerous obstacles to establish a socialist market economy system, ushering in a golden age of stable development for reform and opening up; the Third Plenary Session of the 18th Central Committee played the strongest note of reform and opening up, and the Third Plenary Session of the 19th Central Committee shifted its tone, marking China's entry into a new era of socialism...

The Third Plenary Session of the 20th Central Committee also has significant guiding significance. After the smooth power transfer in the First and Second Sessions and the determination of officials at all levels, what should be done in the next three years, what kind of work thinking, and what kind of tone should be set for major policies and guidelines, all need to be decided at this meeting. The convening of the congress marks the basic completion or conclusion of the organization's internal integration, high-level personnel adjustments, and the unification of different ideas. What remains is how to "roll up one's sleeves and work hard."

In terms of the situation, the current Third Plenary Session faces unprecedented challenges: The pandemic has just ended for a year and a half, and the pressure on local fiscal deficits caused by the pandemic response is still great; the scar effect has far-reaching impacts, and insufficient demand and expected disorder have caused unprecedented downward pressure on the domestic economy; local debt and real estate transformation risks abound, and any slight carelessness could trigger a Minsky moment; the external environment is turbulent, and the international order is fragmented; geopolitical conflicts are intricate and unpredictable, power games between major countries are simmering, and the confrontation between Eastern and Western civilizations is on the verge of being dragged into the water... China faces dual pressures of economic development and national security, and the difficulty of balancing is increasing.

In such a severe and complex situation, the Third Plenary Session, which traditionally discusses "how to do it," becomes extremely important. Whether it revolves around the theme of security and struggle or the theme of development and peace. Trees may wish to be still, but the wind will not cease. The situation is stronger than people. If economic development stagnates and various contradictions and risks erupt concurrently, it is probably the greatest insecurity. To defend against external threats, one must first ensure internal stability. Building a strong foundation is crucial. Taking the initiative to focus on economic development, safeguarding people's livelihoods, and preventing risks is probably the best strategy. In the chaotic and turbulent global environment, whether to focus on economic construction to comprehensively loosen policies and stimulate endogenous growth momentum or to focus on national security to strengthen stability maintenance, preparedness, and disaster preparedness, ultimately, both hands must be grasped firmly, implementing a dual-center strategy of national security and economic development.

Our investment strategy is to find opportunities for band-like, structural transactions and allocations in the dynamic balance between the two. From the April Political Bureau meeting, we can find some clues. The Third Plenary Session is an extension of the spirit of the 20th National Congress. The logic of investment is, in the long run, Chinese-style modernization, in the medium term, high-quality development and new productive forces, and in the short term, countercyclical and cross-cyclical monetary and fiscal policies. After a year of trial and error and correction, the pendulum of policy is likely to tilt towards the economy and people's livelihood.

However, it is important to recognize that after the 20th National Congress, the purpose and tools have undergone fundamental changes. National security has become the purpose, and economic development, including supporting private enterprises, expanding opening up, stabilizing real estate and local debt, has become a method of safeguarding national economic, political, and social security. We can see this transformation from recent anti-corruption efforts among officials, industry rectifications, and a series of actions by national security departments. Facing this change, macro risk factors for investment need to undergo significant adjustments.

Table of Contents

I. The importance of the Third Plenary Session and the particularity of the current Third Plenary Session

II. Why the current Third Plenary Session is late: Good food is not afraid of being late, but being late is not good food

III. Guessing the conference theme: High-quality development, Chinese-style modernization, and greater reforms

IV. Guessing how to set the tone: Continuing to adhere to the dual-center strategy of national security and economic construction

V. Guiding significance for asset allocation: Closely watching marginal signals of a shift from deflationary deleveraging

Main text (significantly abridged due to review reasons)

I. The importance of the Third Plenary Session and the particularity of the current Third Plenary Session

The First Session transfers power, the Second Session determines personnel, and the Third Session plans undertakings.

Therefore, all previous Third Plenary Sessions have been very important, especially for medium- and long-term investment and asset allocation strategies. The Third Plenary Session will determine the basic policy tone and development thinking for this term.

Except for the Third Plenary Session of the 19th Central Committee, which focused on party and state institutional reforms, the core theme of most Third Plenary Sessions is economic construction, which has been the convention since the Third Plenary Session of the 11th Central Committee established economic construction as the center. Economy and people's livelihood are the foundation of everything, which is both the mission of the country and the mission of the party.

However, the initial design of reform and opening up did not solely focus on economic construction, but also included four basic principles. This was the result of the balance between two factions in the early stages of reform and opening up and also the wisdom of China's dual-structure reform. All subsequent ideas were based on balancing economic construction and the four basic principles.

The Third Plenary Session of the 19th Central Committee focused on national governance issues because China had already resolved basic economic issues, and the main contradiction was no longer backward productivity. Political system reform began to enter the agenda. That is, since the 19th National Congress, emphasis has been placed on "remaining true to one's original aspirations." The "original aspirations" refer to the four basic principles, with the party leading everything.

The current Third Plenary Session has greater particularity than previous ones, mainly manifesting in six aspects: governance structure and the culture of lying flat, risks of local debt and abuse of basic power, accelerated bottoming out of the real estate market and systemic financial risks, the final showdown in the power game between major countries, the contradiction between economic downward pressure and high-quality development, and how to coordinate national security and economic development.

The biggest bet is: Will the current Third Plenary Session differ from the Third Plenary Session of the 19th Central Committee and return to the central issue of economic construction?

II. Why the current Third Plenary Session is late: Good food is not afraid of being late, but being late is not good food

Party meetings are not discussions but proclamations of decisions. It is meaningless to convene a meeting before consensus is reached.

Due to the unprecedented complexity of the situation, the decision-making layer is more cautious than ever, and opinions may also be more diversified than ever. Unifying these different opinions requires a longer time compared to the past. Moreover, personnel have been unstable for a long time.

The current issues are not only economic but also social, political, military, and national security issues. Top-level thinking is based on bottom-line thinking. In society, the scar effect is still having a significant impact, with insufficient demand and waning confidence severely restricting economic recovery. The pandemic has just ended, and the arduous three-year pandemic response, while victorious, has also come at a great sacrifice. Local finances are facing unprecedented difficulties, and grassroots power departments have engaged in behaviors such as "adjusting the books" to seize fiscal and tax revenues to ensure operations, severely damaging the relationship between the party and the masses and creating social risks and hidden dangers. Amid the tumultuous power game and geopolitical conflicts between major countries, national security management is becoming routine, and private enterprises and the market economy are not yet adapted, leading to temporary expectations disorder.

The governance structure has been refreshed, but implementation is still "chuzhang governance," and it will take some time for the磨合 of rights, responsibilities, interests, and personnel. It was not until the fourth quarter of last year that the main ministerial officials were determined. And it will take some time for effective coordination.

III. Guessing the conference theme: High-quality development, Chinese-style modernization, and greater reforms

The theme is unlikely to change dramatically and will probably be the implementation of the spirit of the 20th National Congress. Previous conferences have been the result of balance and harmony. Therefore, the theme will only be a summary of previous efforts, and if there are surprises, they will be marginal improvements based on this.

Chinese-style modernization remains the most significant political issue. High-quality development remains the golden rule. In addition, there is a prerequisite, namely, high-level security. The modifier "high-quality" broadens the discourse boundaries and interpretive power of "development." National security is bottom-line thinking. This session will definitely be laid out according to bottom-line thinking.

New productive forces will be an advanced level. However, knowing that the original source of new productive forces comes from the practice of Marxism in China in the 1980s, one realizes that ideological and discourse security have also entered the agenda of bottom-line thinking. Decoupling is not just technical, and ensuring discourse power security is crucial. Unfortunately, most scholars still interpret new productive forces from the framework of neoclassical economic growth theory TFP, showing that they fail to perceive the changing winds within the ivory tower.

IV. Guessing how to set the tone: Continuing to adhere to the dual-center strategy of national security and economic construction

The future thinking is continuous balance, which occurs between Chinese-style and modernization, and between high quality and development.

In terms of specific policy tones, it is about handling the contradiction between national security and economic construction. However, if the economy does not progress, security is meaningless. Conversely, if economic development harms security, then drastic measures will be taken to address it.

In fact, we are now in a state of war, with an internal battle against risks and an external battle to safeguard economic security.

Historical experience shows that it is worth paying a certain economic development cost for national security. Once extreme conditions and tumultuous waves arise, economic construction should serve national security. The foundation of national security, in the perception of senior officials, is the real economy. In their understanding, if finance cannot serve the real economy, it will affect security.

The policy tone continues the positive shift from the fourth quarter of last year: promoting stability through progress, establishing first and then breaking.

Imagination left for the market: greater reforms and opening up, revitalizing Shanghai through the Yangtze River Delta strategy. Shanghai is a wounded city and also a knot in the hearts of senior officials.

To ensure security, it is necessary to ensure the foundation of internal circulation. Shanghai has undergone earth-shaking changes after the fireworks of March and is also an opportunity for reconstruction.

V. Guiding significance for asset allocation: Closely watching marginal signals of a shift from deflationary deleveraging

The real estate market will accelerate its bottoming out and clearance, and more substantial policies are likely to be introduced after the Third Plenary Session. The main tone is crisis-driven decentralization of power to local governments.

The handling of local debt issues needs to coordinate five complex relationships: development and risk, central and local, short-term and long-term, emergency relief and poverty alleviation, and fiscal risk and moral hazard.

The monetization process will accelerate, and the policy toolbox may include a "nuclear-level" tool - it is likely that the basic idea of the central bank purchasing government bonds will be formulated at the meeting. This involves legal revisions.

This will accelerate the process from deflationary deleveraging to inflationary deleveraging.

Of course, do not expect relatively aggressive policies. Even if there are any, they will only be implemented without being announced due to the situation. Looking globally, only China's monetary and fiscal policies still adhere to conservatism, maintaining strategic resolve and maintaining a different socialist financial character with Western countries.

However, according to the April Political Bureau meeting, the positivity of various policies after the Third Plenary Session will increase, especially in terms of local debt and real estate.

In terms of investment, continue to maintain a cautious optimism towards RMB assets, focusing on valuation repair. Maintain the judgment that Hong Kong stocks are superior to A-shares. Maintain positions in national team concept stocks, make moderate cyclical adjustments, and focus on growth opportunities in market segments.

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