中国：展望下一个五年计划——第一部分：社会福利改革

Zhipeng CaiEconomistZhipeng.Cai@morganstanley.com+852 2239-7820 Previewing the Next Five-YearPlan – Part 1: Social WelfareReform Robin XingChief China EconomistRobin.Xing@morganstanley.com Jenny Zheng, CFAEconomistJenny.L.Zheng@morganstanley.com Harry ZhaoEconomistHarry.Zhao@morganstanley.com From debt cleanup to deflation fight, China’s big policy levernow is social welfare reform. With potential near-term costs butlong-term gains, it can rebalance growth, boost confidence, andlift productivity. The late-October Fourth Plenum would signalBeijing's reform resolve. China has come a long way in the 3D Journey – debt, demographics, and deflation:Over the past five years, China has made tangible progress in containingrisks in property and local government debt, helped by a balanced distribution ofproperty sector losses and a central government pivot toward supporting local debtresolution. These, combined with incremental rebalancing efforts and the anti-involution drive, have provided a floor to the economy. Yet deflation pressureslinger. The next Five-Year Plan, to be reviewed by the October Fourth Plenum, willoffer the first glimpse of Beijing's resolve to rebalance and combat deflation. Social welfare reform is pivotal to breaking deflation:China’s social welfaresystem remains fragmented across regions and sharply uneven between urban andrural residents. The corresponding insufficient risk sharing keeps household – hencenational – savings elevated. Persistently high domestic savings have long financedinvestment- and export-led growth, but returns are diminishing and trade frictionsare rising. Sustainable growth now hinges on purposeful rebalancing towardconsumption, alongside policies that unlock aggregate productivity. Reform roadmap – narrow the urban-rural divide and make social security resilient to aging:Lowering the household saving rate will depend on the socialwelfare system's perceived fairness, adequacy of protection, and confidence in long-term solvency amid population aging. Near-term priorities likely include improvingcoverage and generosity for rural residents and informal workers. To secure fundingsustainability, Beijing needs a package anchored by transfers of state-owned equity,SOE governance reforms, and the build-out of a multi-tier social insurance system. Courage to act – large costs, potentially larger benefits:With householdresponses uncertain, more generous benefits could create short-term growth drags,though consumption should rise. Amplified by population aging, it may compressinvestment space in the longer run. Yet the upside is substantial: beyond the familiargoal of a more balanced growth mix with stable inflation, groundbreaking reformscould strengthen buffers for economic and technological transition and enhancelabor force quality. These shifts would support productivity gains beyond "hardtechnology" and help counter demographic headwinds. For important disclosures, refer to the Disclosure Section,located at the end of this report. Executive Summary China's 3D Journey: Arduous Risk Mitigation and StructuralAdjustment in the Last Five Years Beijing has been shifting governance priorities from growth to balancing growth andsustainability: social equality, data security, and self-sufficiency (China Macro & Strategy:China's Regulatory Reset (2 Aug 2021)). Since late 2020, Beijing has rolled out a slew ofregulatory changes across a broad spectrum of sectors. While these regulations werenecessary from certain angles, they weighed on corporate and investor confidence, andkicked off a multi-year economic adjustment. The property downturn, triggered by the "three red lines", hit growth and threatenedsocial and financial stability:See China: Stress Testing the Housing Fallout (29 Aug2022). Policymakers cushioned the slump with cautious support. With a painful yetbalanced distribution of property-related losses across households (undelivered homes),local governments (reduced land sales revenue), property developers (unsold inventory,bankruptcy), and banks (housing-related NPLs), the sharp decline in housing market didnot lead to systemic risks. •We think the housing market is on track to stabilize from late 2026 or early2027. From 2024, severe local financing stress from the housing fallout distorted localgovernment behavior and exacerbated the deflation loop– just as we warned that"reining in risks may be quite a challenge without a sufficient backstop from the centralgovernment" as the economy transitioned away from over-extended debt-driven growth.See China's 3D Journey: Resolving China’s LGFV Problem (28 Aug 2023). Beijing made a major policy pivot in September 2024– supporting local governmentdebt resolution with a five-year, 10 trillion yuan debt swap program. Credit spreadsnarrowed and market concerns eased. •LGFV risk has not been a primary market focus in 2025. The job isn’t done, but after years of effort on multiple fronts... •Risk digestion,•A major polic