Chinese Tea Leaves

Mar 8, 2024

At this time of the year, the eyes of China watchers turn to the annual “two sessions” meetings taking place in Beijing. Two parallel gatherings in Beijing—the nation’s elected legislature (National People’s Congress) and the political advisory organization of the Party (Chinese People’s Political Consultative Conference)—set the stage for the Chinese policy debate for the upcoming year. The meetings are typically tightly scripted, rarely offering major surprises.

While this year was basically no exception, there was one small twist. The Premier normally bookends the two sessions, opening the proceedings with a formal presentation of the Government’s Work Report and then closing the meetings with a press conference to a large gathering of domestic and foreign journalists. In a significant departure from past practices, the Premier’s press conference was canceled this year, with little explanation as to why. These media briefings rarely make news. Wen Jiabao (premier from 2003 to 2013) was a notable exception; in his press conference of 2007 he sparked considerable debate about the risks to a seemingly strong Chinese economy by pondering what became known as the paradox of the “Four Uns”—an economy that was becoming increasingly unstable, unbalanced, uncoordinated, and unsustainable; in his final press conference of 2012, Wen spoke of the need for Chinese political reform and in doing so telegraphed the mounting political problems of a rising Party figure, Bo Xilai.

The Work Report is usuaally the main topic of discussion. It offers a review of accomplishments over the year just ended and an assessment of the challenges for the year ahead—establishing policy priorities for the “work agenda” wrapped around a numerical GDP growth target. In his maiden Work Report on March 5, Premier Li Qiang delivered a widely expected message—a GDP growth target of around 5% to be supported by China’s all-too-familiar stance of “proactive fiscal stimulus and producent monetary policy.”

This view plays into the major debate now raging over the state of the Chinese economy. Most observers, me included, believe that the Chinese economy faces the confluence of tough cyclical and structural pressures; the cyclical problems are concentrated in the property market and local government financing vehicles, and powerful structural headwinds stem from excess leverage, a shrinking working age population, and worrisome productivity prospects.

In this context, my view is that the conventional policy framework outlined by Premier Liu is necessary but not sufficient for China to hit its growth target. Yes, the recipe resembles earlier efforts that China successfully deployed in the aftermath of the Asian financial crisis of 1997-98 and the 2008 global financial crisis. But the current internal growth challenges may well be more daunting than the external challenges China faced in the past 25 years. Moreover, Chinese policymakers once again appear to be resorting to the brute force of large cash infusions to address today’s major dislocations in the property market, local-government financing, and the stock market. This may not be enough to offset the powerful structural headwinds noted above and move the needle on Chinese rebalancing. Consequently, the risks, in my view, are tilted to the downside of this year’s 5% growth target.

This conclusion underscores a big disconnect with the general impressions I pick up inside of China. Chinese officials, as well as the domestic media, still sing the praises of China as the major engine of global economic growth. While this is still technically correct on the surface, beneath the surface a more nuanced story is now evident.

Significantly, the power of the Chinese growth engine is not what it used to be. In the decade following the Global Financial Crisis (201-19), Chinese economic growth accounted for fully 32% of the cumulative growth in world GDP, nearly 40% faster than the 24% contribution over the 2000-08 per-crisis period. Yet over the past three years, 2021 to 2023, China’s contribution to global growth declined, accounting for “just” 24% to the cumulative increase in world GDP; while that is still impressive and continues to qualify China as the largest source of world GDP growth, the share has fallen back to the pre-crisis contribution of 2000-08 noted above.  This reflects both a slowdown in GDP growth as well as a reduction of incremental gains in the China’s PPP share of world output. Of the two forces at work, the growth slowdown to 5.5% over 2021-23—more than two percentage less than the 7.7% pace of 2010-19—has outweighed China’s still rising share of global  GDP.

China has long enjoyed the reputation as the major engine of global economic growth. Its strength and resilience were especially notable in the decade following the Global Financial Crisis of 2008-09, when the Chinese economy may well have been the only thing that prevented the world from lapsing back into a post-crisis recession. Yet that resilience is now ebbing, a development that is likely to be a topic of increasingly intense discussion inside of China, as well as in the world at large, over the year ahead. That could well be one of the most important stories behind the headlines at the just-concluded Two Sessions.

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