Chinese leaders expect strong growth despite headwinds
Some China watchers now believe that China's economy is likely to grow around 3% to 4% annually over the next few years, a dramatic change from recent years. However, at the annual National People's Congress (NPC) in Beijing last week, Premier Li Qiang said he expected growth to be 5% this year. This did not reflect a planned change in fiscal policy. Rather, Lee said he expects next year's budget deficit to be the same as last year. Therefore, no changes in fiscal policy are expected. Moreover, his optimistic outlook did not reflect a view that China's challenges have receded. Instead, Li said, “The foundations for continued recovery and improvement of our economy are not yet solid, including insufficient demand, overcapacity in some industries, weak social expectations, and many risks remaining.” he admitted.
So what is the basis for expecting relatively high growth? The answer is that the government seems to believe that the economy has bottomed out and that things will soon improve. Mr. Lee's forecast assumes that the inflation rate will be 3% in 2024, a significant increase from the current deflation rate. Li's presentation at the National People's Congress included an estimated RMB 1 trillion (US$141 billion) package aimed at stabilizing the chaotic real estate market, boosting birthrates through improved maternal and child policies, and “strengthening security capabilities in key regions.” ) included plans to issue a considerable amount of special government bonds. ”
The issuance of special bonds of the same amount as last year will be done separately from the central government budget. While some observers consider special bonds to be a sign of an intention to address economic issues, no change in the amount of such bonds means no change in the government's fiscal stance. Therefore, there is no economic stimulus effect. Therefore, there were no dramatic policy shifts that could form the basis for changes in expectations regarding economic performance.
The government also announced a slight increase in the amount of special purpose bonds issued by local governments compared to last year. This is intended to help local governments phase out the problem of large debts that were supposed to be covered by the sale of land. However, problems in the real estate market have significantly reduced the ability of local governments to generate income through the sale of land. This is not likely to change anytime soon. Furthermore, the government announced that transfers from the central government to local governments this year will increase slightly by 4.1% compared to last year.
A target of 5.0% may not seem that lofty given that economic growth in 2023 is reported to be 5.2%, but the impact of a weak 2022 boosted last year's growth. It is worth noting that (it was a very slow year of growth due to the coronavirus lockdown). Therefore, to match last year's growth rate in 2024, economic performance will have to change significantly.
Finally, despite the government's apparent optimism, significant headwinds remain and strong growth is likely to be difficult to achieve. First, although personal consumption obviously accelerated moderately during the recent Lunar New Year holiday, household savings remain at a high level. Moreover, the loss of wealth due to declines in asset values may allow households to maintain high savings if they are willing to replace the lost wealth. Therefore, it is difficult to know what will cause household spending to rise significantly.
Second, the sharp decline in inward foreign direct investment (FDI) is unlikely to be reversed this year, especially given current relations with the United States and other Western countries. This means less impetus for private sector investment. Moreover, changes in supply chain investments could gradually undermine China's export capacity. However, the government's statement encouraged foreign direct investment. For example, Premier Li said, “We will strengthen services for foreign investors and make China a preferred destination for foreign investment.” We will make it easier for foreigners to work, study and travel in China. ” Even if these words are followed by action, it is unclear whether it will cause a change in the intentions of global companies. After all, there has already been a significant shift on the part of global companies towards ensuring supply chain resilience through diversification away from China.
Third, the weaker global economy, combined with the possibility of tighter trade restrictions, does not bode well for faster export growth. The government is promoting key industries (electric vehicles, information technology) as export champions. However, it seems likely that the United States and the European Union will impose new restrictions on imports of these products from China.
Finally, China continues to suffer from overcapacity in industry, especially in the state sector. Disinflationary pressures are likely to remain unless there are major efforts to boost demand, and unless the state sector is restructured to deal with overcapacity. This is likely to affect investment and household spending.
Still, the government emphasized investment in new technology as key to sustaining growth. It said it intends to expand investments in electric vehicles, pharmaceuticals, hydrogen power generation, biomanufacturing, commercial spaceflight and quantum technology. This is partly aimed at promoting independence in a time when economic relations with other countries are difficult. China can certainly rely on its huge domestic market to expand its scale. However, significant restrictions on the export of these products and restrictions on access to foreign technology could weaken these industries and reduce their impact on growth.
