China’s National People’s Congress (NPC), the largely ceremonial parliament that meets every year in March to rubber-stamp decisions by the leadership, is seldom accompanied by a great deal of suspense. This year, for example, the biggest surprise was that the proceedings would be even more predictable than ever as the final news conference by Premier Li Qiang, one of the few unscripted parts of the entire affair, was canceled.
NPC spokesman Lou Qinjian explained the decision to reporters on March 4, the eve of the NPC, saying that any information of public interest they might need was “easily accessible” on official reports published during the weeklong proceedings and through interviews with lawmakers.
The government’s caution was understandable given the drumbeat of bad news about China’s economy and its apparent reluctance to address it: A weak housing market, a massive overhang of local government debt, rising youth unemployment and deflationary pressure were among the topics likely to come up. Ordinarily, these would have been dealt with at the third plenum of the Chinese Communist Party, which decides on medium- to long-term economic reforms. The plenum was expected last fall but still has not been announced.
Those who were looking to the NPC as a bellwether for Beijing’s policy response were disappointed, however; they were given little detail on how the government would solve its mounting economic problems. Beijing has set a goal of creating 12 million jobs in 2024 but seems reluctant to introduce any measures that would strongly stimulate the economy. Economists say leaders are worried about the fallout from a property market bubble and anxious not to exacerbate it — house prices grew 34% in nominal terms from 2012 to 2021, but since then have fallen 10% as the government has allowed some indebted real estate developers to fail.
“The government’s focus is still on managing risk,” said Dan Wang, chief economist at Hang Seng Bank in Shanghai. “They want to contain the risks in the housing market by cutting the debts of real estate developers, and that policy hasn’t changed at all. There are no measures that would re-inflate the asset bubble.
“What they want to do is contain financial risks while creating enough jobs.”
While China’s economy, starting in the 1990s, grew most years by close to 10%, those days of easy economic expansion appear to be over. Economists are pessimistic about this year’s growth target of “around 5%,” announced March 5 by Premier Li. Last year, thanks to lending rate cuts and additional fiscal spending — not to mention the end of COVID-19 controls at the end of 2022 — the economy grew by 5.2%, in line with official estimates. But this year the general consensus is lower. The World Bank, for example, predicts growth of 4.5%.
“I think the 5% is a reasonably ambitious growth target,” Joseph Peissel, an economist at research firm Trivium China, told Nikkei Asia. Like others, Peissel was concerned that the fiscal deficit target — the difference between government expenditures and revenue — of 3% of GDP was too low to stimulate growth but argued the “real shot in the arm” would come from a 1 trillion yuan ($139 billion) special treasury bonds issuance announced at the NPC and planned for later this year. That would send aggregate government spending up by 4.4% in reality, added Peissel.
Many assumed that the government would attempt to stimulate the economy with what economists call a “big bazooka” — similar to the 4 trillion yuan in spending that saw China through the global financial crisis of 2008-09. However, that saddled local governments, which did the lion’s share of the borrowing and spending, with a debt burden that continues to plague the economy.
“Primarily, [policymakers] don’t want to repeat past mistakes,” said economists Harry Murphy Cruise and Sarah Tan at Moody’s Analytics, referencing the crisis.
Real estate and infrastructure investment used to be the twin engines of China’s growth, and economists say that the long-term task before the Chinese government will ultimately be to rebalance the economy to rely on consumption, rather than investment, for growth. In 2021, total investment as a percentage of GDP was among the highest in the world at 43.3%, while consumption was among the lowest for major economies at 54%.
“China is massively misallocating investment into the property sector and infrastructure and has been for years, so they’ve got to bring that down,” said Michael Pettis, a professor of finance at Peking University’s Guanghua School of Management. “But if the growth in GDP is largely a function of growth in consumption and growth in investment, and you sharply bring down investment, either you have to raise consumption, or GDP growth will drop sharply.”
Betting on technology
Thus far the NPC has signaled that China would not depart from this investment-driven model of growth. “Of course, it would be ideal to boost consumption,” Wang said, “but the current economic structure, and where the capital is going, does not support a consumption-based model.”
The main difference outlined at this year’s NPC was a new focus on investment in high technology, rather than infrastructure and real estate, a trend that began during the pandemic: Official data shows fixed asset investment by the manufacturing sector grew 6.5% in 2023, while real estate declined by 8.1%.
“They talk about stabilizing the property market, and there are indications that infrastructure is not going to be the big engine that it was in the past,” Pettis said. “For the past couple of years they have been shifting investment out of the property sector and into manufacturing. The hope is that high-tech manufacturing will somehow solve the problem of productivity.”
Major initiatives planned for this year include the reemphasis on high tech such as electric vehicles, hydrogen energy, biomanufacturing, commercial aircraft and quantum computing. The 2024 budget for science and high technology is set to increase by 10%, even higher than the increase for defense at 7.2%.
Using the term “new productive forces” and underscoring the importance of high-tech industries, President Xi Jinping told delegates on the sidelines of the NPC that they were needed to achieve high-quality development.
Most of the sectors identified as priorities at the NPC are part of a policy first unveiled in 2015, called Made in China 2025, and again in the five-year economic plan starting with 2021 as Beijing began to stress technological self-reliance, investing in its domestic high-tech industries after Western sanctions closed off imports of many products.
“The high profile being given to Xi’s new productive forces seems more about boosting sentiment than a new direction for policy,” economists at U.K. research firm Capital Economics said.
“They’re talking about shifting investment to more productive areas by focusing on high tech, but there are two problems with that,” Pettis said. “One is the high-tech area is pretty small, and the other is that many other countries in the past have tried the same thing.”
He added that the Soviet Union in the 1960s and Japan in the 1980s tried to reallocate investment to high-tech industries as a macroeconomic growth engine, without success. “That never really happens because the high-tech sector is too small, and the vast majority of the economy doesn’t really benefit from high-tech investment,” he said.
Piecemeal measures
The primary focus of government policy, however, continues to be to unwind from the housing crisis. Here, the government wants to let air out of the market gradually, say economists, without provoking a major panic. While forcing some property developers into default and bankruptcy, the government simultaneously has been trying to support prices with limited measures introduced in 2023 to buoy housing demand such as lowering the down payment for a mortgage and easing other purchasing conditions.
The government’s options are limited, given the massive oversupply of property that now threatens to collapse the market, and take many banks with it. It would take an average of 22.4 months to sell all new housing stock that was on the market at the end of 2023, the longest such span since February 2012, according to E-house China R&D Institute. In smaller cities such as Shaoguan in Guangdong province, it would take 131 months, an indication of how severe the oversupply is after decades of local governments relying on property to shore up revenue and their economies.
In the 2024 budget, the government pledged to provide lending to the country’s financially troubled developers through “justified financing.” Meanwhile, the central bank governor said there is still “plenty of room” for monetary policy adjustments to buoy confidence.
For now, the government is imploring manufacturers to upgrade equipment and households to use trade-in programs to buy EVs and new electrical appliances.
Policymakers estimate the market for equipment upgrades could reach over 5 trillion yuan, but analysts say that following the government directive would only bring future consumption forward.
“On an aggregate, that doesn’t generate new consumption,” Trivium’s Peissel said. And if the trading scheme led to downward pressure on the price of these items, it could exacerbate deflationary pressure, he added.
China’s consumer prices have flirted with deflation in recent months as consumers defer spending and investing. Wang of Hang Seng Bank said the majority of savings increases come from people waiting to buy homes or invest in the stock market, rather than holding off on consumption, however.
No easy fix
China has an advantage in many high-tech sectors such as EVs and lithium batteries, but the shift to relying on these industries to drive long-term growth has its own challenges, analysts said.
“Even if these investments in high tech pay off, and frankly I think a lot of them will, that doesn’t necessarily mean that productivity across the entire economy is going to rise,” said Arthur Kroeber, head of research at China-focused research firm Gavekal Dragonomics.
High-tech companies employ only a small portion of the country’s workforce, he added, noting that most employment opportunities in the past decade were in the services sector, a trend that is unlikely to change.
Success also depends on whether China can expand exports in the sector, which would be difficult given similar plans in India, Japan and the U.S., and rising protectionism in major markets. The European Union, for instance, is mulling whether to investigate Chinese EV subsidies.
“That is a recipe for a lot of protectionist backlash, particularly from rich countries [such as] the U.S., Europe and maybe some of the Asian countries as well,” Kroeber said.
Richard Clode, a portfolio manager at Janus Henderson Investors, said China faces long-term growth challenges from restrictions on using foreign tech in developing artificial intelligence. “There’s just a much more select opportunity set than we’ve seen for a long time because there’s just not so much growth around, and some areas [are] kind of geopolitically much more risky,” he told Nikkei Asia when asked how the NPC could impact investments.
That leaves China with little choice but to expand domestic demand and aim for greater export diversification to emerging markets, according to Ma Guonan, senior fellow at the Asia Society Policy Institute in the U.S.
“[The government] will have to bring up the issue of the role of the private sector before it’s getting too late and before the entire private sector loses confidence,” Ma said.
In Hong Kong, where the majority of listed stocks are from China, the flagship Hang Seng Index dropped 13.8% in 2023, the fourth year of a losing streak. In the mainland, the CSI 300 benchmark index lost 11.4% last year. However, a roughly 20% rally since January in tech stocks belonging to the Hang Seng Tech Index has led to an uptick in the overall market.
In the short term, China needs to continue with more assertive monetary and fiscal easing to turn around investor sentiment and public confidence, according to Chi Lo, senior investment strategist for Asia Pacific at BNP Paribas Asset Management.
“If Beijing can sustain its assertive easing in the coming months, there is a fair chance of a sustained rebound in Chinese economic growth and stock market this year,” Lo said. “If not, we could see Chinese growth stuck in low gears, further weakening China’s asset prices.”
But after the central bank cut mortgage rates to 3.95% from 4.2% in February, it remains uncertain how wielding monetary policy tools might boost demand for housing, which is speculative in nature. Some buyers appear to be waiting until property prices slide further before they buy: “No rush,” said Jiang Weirong, an engineer in Shanghai who initially planned to buy a house last year. “There is still no sign of the price hitting bottom.”
“Policymakers don’t have an immediate solution to the real estate crisis,” said Trivium’s Peissel, who expects property prices to continue falling.
A further rate reduction would be difficult to pull off, Peissel added, noting that taking this route would further erode banks’ profitability, already at an all-time low. “The central bank,” Peissel said, “is limited in how much further it can cut rates.” (Nikkei Asia)
