A MISSED OPPORTUNITY TO BOOST CONFIDENCE

Considering the delay for the third plenum of 20^th Central Committee which is historically known for laying out Communist Party of China’s (CPC) economic outlook, a lot of eyes were pinned on this year’s government work report (GWR). Conventionally, GWR, presented by China’s Premier, highlights past year’s economic performance as well as announces specific growth targets and challenges for the upcoming year. However, this year’s GWR was particularly important mainly for two reasons – firstly, it was a litmus test for current Premier Li Qiang amidst doubts regarding his ability to steer the Chinese economy due to his unconventional rise to premiership. Secondly, China’s economy is currently going through a set of unprecedented structural challenges – that includes weak demand, industrial overcapacity and low expectations. Thus, GWR was expected to include policy actions required to mitigate these challenges.

Despite these challenges, continuing on the past year’s achievements, GWR has set the target of around 5 percent growth rate for 2024 which may look attractive to investors, but would be difficult to achieve considering other dwindling growth indicators such as GDP deflator. It also re-emphasized focus on “high-quality development” over rapid growth and made some provisions for the development of new quality productive forces (新质生产力). Whether China is able to achieve these targets and fulfil promises made to boost confidence in economy, will depend on its ability to mitigate challenges – both cyclical and structural. Thus, analysis of GWR provides valuable insights into China’s economic planning for the upcoming year and measures taken to get the economy back on track. 

Ambitious Growth Targets

After three years of economic restrictions, China achieved a growth rate of 5.2 percent in 2023, indicating a modest post-pandemic recovery. However, Li, during his speech, acknowledged that repeating this success in 2024 would be a herculean task as “foundation for China’s sustained recovery and growth is not solid enough.” Most importantly, achieving 5 percent growth rate in 2023 does not guarantee its repetition in 2024 as the base of comparison was much lower in 2023. As a result, most global agencies have estimated China’s growth rate to hover around 4.5 percent in 2024. Moreover, in 2023, 17 provinces registered growth rate above the national average that included four of the top five provinces in terms of GDP – Guangdong, Jiangsu, Shandong, Zhejiang and Sichuan – which contribute over 40 percent of China’s total GDP. In 2024, these five provinces must continue a similar trajectory and achieve their targeted growth rates between 5 to 6 percent for China to reach its own target. However, lack of foreign investors’ confidence and consequent reduction in FDI inflows since 2021 can affect growth trajectory of these eastern provinces as they attract majority of China’s FDI inflows. Thus, these provinces may get more preferential treatment in the coming year if China has to achieve 5 percent growth, leading to less assistance to already debt-ridden western provinces by Beijing. 

Moreover, other indicators like Consumer Price Index (CPI) and exports growth have not been promising in 2023 (although exports have shown some signs of recovery in 2024). CPI was barely positive in 2023 (grew annually just by 0.2 percent), indicating rising deflationary pressure on Chinese economy. Thus, this year’s CPI target of 3 percent would be very ambitious to achieve given sustained lack of domestic and external demand as well as excess supply caused by industrial overcapacity.

Furthermore, the overall lack of effective demand, evident from high savings rate over the years, is a major concern for Chinese policymakers as also mentioned in GWR. Thus, despite high local government debts, China has marginally increased special bonds for local governments to 3.9 trillion yuan and allocated 700 billion yuan for investments in central government’s budget. It has also announced ultra-long special treasury bonds worth 1 trillion yuan ($139 billion). Since these bonds will not be considered in fiscal deficit, such moderate fiscal stimuli will still allow China to keep its budget deficit within the limit of 3 percent to GDP. However, such special bond issuance has only been done thrice until now, all during grave economic situations faced by China like the pandemic or global financial crisis. Current economic environment seems to have reached that stage for Chinese policymakers. Thus, Beijing may, like last year, breach the deficit ceiling midway if household demand continues to remain lacklustre. 
                                       

Focus on New Quality Productive Forces

Last year’s Central Economic Work Conference (CEWC) identified technological innovation as the top focus area in 2024 to build "modern industrial system" which in turn would lead to high-quality development. Continuing on that trend, GWR also accords top priority to new quality productive forces as China aims for innovation-driven development. These productive forces include emerging industries like green energy, artificial intelligence, commercial aerospace, low-altitude economy, quantum computing and so on. Promoting these industries serves several purposes for China at the same time. Firstly, it will assist Xi’s self-reliance goals, necessitated by restrictions on technology access and rising tariff barriers on Chinese products. Secondly, it can absorb China’s educated unemployed urban youth to some extent and thirdly, growth in these emerging industries can drive China’s overall growth as its primary contributor – real estate sector – remains crisis-ridden. It will also help China move towards high-end manufacturing and at the same time, increase “total factor productivity” – an objective necessary to address demographic challenge and restrictions on access to foreign resources.

One of the major contributing sectors in these new productive forces will be green energy. Importance of this sector is evident from a new target of cutting down energy intensity by 2.5 percent despite missing last year’s 2 percent goal. This indicates that more demand-side policies will be introduced for this sector ranging from solar to electric vehicles since China has already achieved sufficient supply capacity. In fact, GWR also mentions electric vehicles, lithium-ion batteries and photovoltaic items as the “new trio” which can help China support its falling exports and maintain its dominance in global renewables supply chains. Thus, Beijing needs to create more domestic demand in these sectors through long-term policies and aim to offset the drag down effect caused by traditional growth drivers.

Managing Perception About Economic Health

Besides major economic challenges, negative perception about Chinese economy is a major issue for Beijing which has drastically reduced the confidence of both domestic and global audiences. On this front, GWR was expected to at least formulate favourable policies to regain this confidence, if not a comprehensive reform plan. It was expected to follow on the path of the action plan introduced in 2022 to boost consumption and introduce policies targeting structural issues. GWR mentions some measures nudging consumers to spend on smart homes, tourism, sports as well as on new energy vehicles, electronics products and other “big-ticket” products. It also calls for a year-long program to boost consumption, but did not mention specific action plan. These efforts, on one hand, indicate a shift to demand-side reforms, but are insufficient to motivate Chinese citizens to spend more as it does not involve structural reforms like lowering health and education costs or stronger social safety cover, to name a few. More importantly, additional efforts are needed by Beijing to regain people’s trust lost due to the unstable policy environment during the pandemic which caused people to save more for contingencies.

For an external audience, the GWR lists down measures to attract foreign investments such as reducing restrictions on foreign investments in services and creating autonomous free trade zones. However, Beijing must realize that problems of foreign investors are more connected to their perception about the restricted political and regulatory environment in China. Banning critical analysis on Chinese economy, restricting market analysis firms or investigating foreign companies under the garb of security has further shaken investors’ confidence. Thus, although CEWC recognized “stabilizing expectations” as one of the key priorities for 2024 along with growth and employment generation, Beijing has failed to capitalize on it in the work report and sudden cancellation of Premier’s post-two sessions press conference will only aggravate these concerns.

GWR also touches upon other economic challenges like elderly care, unemployment among educated youth, real estate crisis and debt management, although without much concrete policy directions. One could argue that GWR is meant to indicate only broader policy orientation of the government for the coming year. However, given severe challenges – both domestically and externally - faced by China, Beijing seems to have missed the opportunity to instil more confidence by introducing more targeted policies through GWR. While Li Qiang acknowledged that targets set for this year will not be easy to achieve, work report falls short of offering a roadmap to achieve them, and leaves open several policy gaps on multiple fronts that might be filled at the upcoming third plenum.