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Times op-ed – Greater challenges lie ahead for China’s policymakers

Mar 12, 2024

This was first published in The Times – 12 March 2024.

The Two Sessions, China’s big annual political and policy gathering, has taken place in Beijing over the past week. A highlight was the opening works council speech by Li Qiang, the Chinese premier, as it unveiled the government’s present economic and policy thinking.

The Chinese economy has entered a new stage in its transformational change. Double-digit growth rates are a thing of the past. Instead, the focus is on improving the quality of growth, boosting living standards and building a modern industrial society.

Over the past quarter of a century, China accounted for a third of global growth and exported low inflation. During this time there were countless predictions of imminent economic doom. Such pessimism may be viewed like a stopped clock: of no use in telling the time but on occasions it will be right. The fear for some is that now might be one of those times. Growth is sluggish, youth unemployment may be one in four and prices are falling, feeding fears of deflation. Although the central government’s finances are sound, a significant problem is debts in local government and the property sector.

Additional hurdles to overcome to boost growth include high personal savings at a time when the economy needs more domestic consumption. Years of soaring investment also have left excess in some areas. Global uncertainty and geopolitics have created headwinds for Chinese trade and have caused inward investment in China to fall.

Yet China is the world’s second biggest economy and its deep supply chains reflect its huge influence. As expected, Li announced a 5 per cent growth target for 2024. At such a rate, China would add the equivalent this year of an economy the size of Poland, the 21st biggest in the world. China’s aim is also to create 12 million urban jobs this year, but this requires the private sector to play a pivotal role. Although Li sought to address some of the private sector’s concerns, it is a case of watch policy actions and regulations. China’s ministry of commerce also recently held meetings with foreign companies to gather views.

Policy continuity, economic stability and investor confidence have been the priorities this year. The policy levers, though, may have to evolve. The mantra remains that of a pro-active fiscal and prudent monetary policy. There appears to be a reluctance to embark upon significant stimulus, as used to be the case. There will be a boost, but it will be more targeted. Expect monetary easing, with liquidity injections via reductions in reserve requirements for banks, plus small cuts in policy rates and debt restructuring. Li announced a plan to issue sizeable amounts of long-dated bonds, taking advantage of low borrowing costs. This makes immense sense.

What we can say with confidence is that China’s future trend rate of growth will be slower and in all likelihood more volatile than in the past. The population is older and shrinking and one cannot run a large economy easily from the centre.

A decade ago China talked of avoiding the “middle income trap”. It is much harder for a country to move from middle to high income than it is from low to middle income, as it has done.

China needs broader and deeper capital markets, to fund the burgeoning budget deficit and to help to ensure that high domestic savings fund the right type of investment needed. The policy implications are twofold. One is for higher domestic consumption, with more transfer payments. Another is a shift to new investment opportunities. Just as China dominated low-wage production before, it has moved into higher-value-added areas, such as electric cars and space. Another success is greater investment in the green agenda and a transformational move into renewables.

One needs to be more open-minded about China’s prospects in the face of its economic challenges. Yet the policy clock has not stopped and now is not the time to become pessimistic about China.