China's NPC lacks effective solution for economic woes - SOAS China Institute

//China’s NPC lacks effective solution for economic woes

China's NPC lacks effective solution for economic woes

Great Hall of the People on Tiananmen Square, Beijing, China. – Photo credit: Gary Todd

By George Magnus | 12 March 2024

In an interview with mainland Chinese online magazine, Caixin, Martin Wolf, the Financial Times’ Chief Economics Commentator, was quoted as saying that it would be quite easy for China to grow at 5 or 6 per cent for another 20 years, provided the government allows it to be generated by markets, entrepreneurship and continued investment in new industries. While a number of Chinese economists have subscribed to this view for some time, their lament is that under Xi Jinping, the government has turned its back on markets, entrepreneurship, and openness in a climate of ever more party control and repression.  Anyone paying attention to the recently concluded National People’s Congress – China’s parliament – would have noted the customary cheerleading, but also the absence of anything new or interesting to address what Premier Li Qiang described as a ‘lack of effective demand, overcapacity in some industries, low public expectations, and many lingering risks and hidden dangers’.


The main things that NPC-watchers were looking for were whether there would be any change in emphasis regarding where the government wanted to be on the growth-security axis, what the GDP target for 2024 would be, and how the government would frame its policy priorities, especially with regard to so-called “new productive forces” – or cutting edge science and technology industries – and to the more beleaguered real estate, local government and finance sectors.


Xi Jinping has often spoken about the growth-security choices, normally favouring the latter, as evidenced both by coercive and punitive measures against certain sectors and executives, and also by an array of laws and regulations covering, for example, espionage, sanctions, state secrets, cybersecurity, and data and information transfers. Yet, there have been signs that a modest shift has been underway.


Easier monetary conditions have eased, greater liquidity, looser regulations for real estate developers and housing, and increased local and central government borrowing for projects have all figured in recent months. Further, the government has certainly offered private and foreign firms a warmer rhetoric and sponsored some new collaborative initiatives in an attempt to persuade them to spend and invest.


The economy currently has gained some momentum, thanks to measures introduced in the last months of 2023. Should these falter later in 2024, the government may have to take new steps to stabilise the economy, let alone reaching the targeted growth rate for the year.


This year’s target, set at “around 5 per cent” (similar to 2023), will be much harder to hit because unlike 2023, there is no rebound from Covid-affected 2022. In any event, potential growth in China nowadays is probably no higher than 3 per cent, and so the government will almost certainly have to boost incomes and consumer spending later this year – beyond measures already proposed to trade in old- for new durables and upgrade some social payments –  or revert to more real estate and infrastructure borrowing to support growth.


As expected, the NPC focused a lot on new productive forces, or advanced technology sectors such as semiconductors, robotics and AI, new energy vehicles, materials and technologies, and chemicals and biomedicine. In Xi’s thought, these industries embed future prosperity and global leadership, but the essence of the term is not so different from predecessors such as indigenous innovation, Made in China 2025, supply side structural reform, dual circulation strategy, common prosperity, and high quality development – all of which are designed to spur greater production and prosperity at home, and dominate in the wider world.


We should not doubt the government’s intent in these matters, but we can question how effective they might be and whether state-led innovation and productivity is something of a contradiction in terms. China has and can certainly develop islands of technological excellence but these can co-exist quite unhappily with systemic economic problems elsewhere, including weak demand, deep-seated macro imbalances, misallocation of capital and low productivity growth as represented in real estate, infrastructure, local governments and the finance sector. Further, the single-minded focus on production, overcapacity and boosting exports is stirring deeper trade conflicts with major trade partners, as they now loom, with the EU as well as the US.


The government certainly wanted to lift spirits at the NPC, and the mild shift in emphasis towards economic growth fulfils that purpose. Yet, in the details that were announced or put in documents, there was nothing of substance that suggested the government had embraced new or comprehensive measures to guide China away from what Li referred to as the “lingering risks and hidden dangers.”


It is possible that the still unannounced Third Plenum will shed some new light on the government’s thinking on shifting China’s development model away from real estate and infrastructure to a more sustainable consumer demand- and service-oriented economy. This would at least fill a huge void that the NPC left alone.


Yet, this forum may also do no such thing, and the awkward politics that keep the government on its current path will probably continue. The acid test later this year concerns the amount and type of stimulus the government is prepared to implement. It could certainly keep the pressure on local governments to mend their own fiscal shortcomings but turn to some sort of short-run consumer-linked stimulus designed to lift production. What it won’t do though is turn the development model on its head, or institutionalise the kind of entrepreneurship, and implement changes to social welfare, the tax system and household income formation that would serve the economy, but not the party.

George Magnus’s principal research focus is the political economy of China, and the implications and consequences of its economic development path. George received an MSc in Economics from SOAS and undertook further postgraduate research in developing economies at the University of Illinois. He subsequently worked at the Foreign Office’s Central Office of Information before embarking on a career in the finance sector that took him to Lloyds Bank and Bank of America, and then as Chief Economist to both SG Warburg, and finally to UBS. Since retiring, George has been a Research Associate at both the SOAS China Institute, and the China Centre at Oxford University. All his public domain work can be found at his website.

The views expressed on this blog are those of the author(s) and are not necessarily those of the SOAS China Institute.