How does the shift towards a domestic demand-led growth strategy align with China’s long-term economic goals, and what are the anticipated challenges in transitioning away from export-led growth?
The 2023 Chinese Central Economic Work Conference (CEWC), an annual meeting mechanism of the Communist Party where the economic direction of the nation for the upcoming year is deliberated and agreed upon by key stakeholders, recently concluded on December 12, and the readout from the meeting stresses a stability-oriented pathway for the Chinese economy in 2024. Overall, the line of action seems pretty clear, at least from the CEWC deliberations – moving away from export-led to domestic demand-led growth, expanding high-quality production process, achieving self-reliance in critical tech but collaborating with trade partners as necessary, and ensuring financial discipline alongside stability of funds and liquidity. Needless to say, many of these goals have been repeated in the past few years, but some of them require intense structural reform, including by means of abandoning long-held beliefs and practices of the Chinese party-state.
How is China strategically addressing the challenges?
To begin with, the 2023 CEWC acknowledged that China is indeed leaving behind three years of tumultuous economic policy planning during the COVID-19 Pandemic, concentrating now on economic recovery in key areas.
The first key area, in this regard, is dual circulation. As global demand has continued to decline amidst heightened sentiments of protectionism and ‘de-risking’, thereby leaving overcapacity in China’s manufacturing sector unaddressed, the country is now looking inwards to boost domestic consumption and only allow for a complimentary relationship with international demand. The Chinese President Xi Jinping has referred to this as the “New Pattern of Development,” and is an ambitious structural reform for a country known as the world’s manufacturing hub. Hence, it is likely that going forth, the country shall lay increased emphasis on domestic demand as the mainstay of economic growth, with international demand only complimenting it.
What specific measures or strategies are being implemented?
The turn to domestic demand has now accentuated the concept of “high-quality” growth of the economy, i.e. growth which is only backed by quantitative success and not superseded by it. For the CPC, addressing the primary economic and developmental contradiction of the century is key to ensuring domestic legitimacy, and under Mr. Xi, the principal contradiction is between unbalanced and inadequate development and the people’s ever-growing needs for a better life. Naturally, the need for a better life has become the foundation for high-quality growth, alongside the necessity to focus resources on specialized self-reliance, which is being fuelled by U.S.-China geopolitical contestation and declining exports.
The focus is also now on vitalising research and development in sectors requiring high-quality growth, such as high-technology and sustainable manufacturing, while little provisions have been made for low-end manufacturing segments in the CEWC readout. Agriculture, however, has continued to receive attention, given that the sector continues to contribute about 7.3% to the Chinese GDP, and about 5% to GDP growth (both as of 2022). Moreover, agriculture-linked incentives align with other policy goals such as “rural revitalisation” and food security. At the same time, the economic plan also aims to technologically advance agriculture through the establishment of “agriculture innovation centers.”
Self-reliance in core technologies has continued to be a repeated and explicit goal for the revival of the Chinese economy, in the backdrop of intensifying tech-related export controls placed by the U.S. and its issue-based and treaty-based allies (such as the Netherlands and Japan respectively) against China. Although, the language of the CEWC readout has changed from “self-improvement” in high-technology in 2022 to “strength” in 2023. Speculatively, it may be so that the shift from self-improvement to strength demonstration is a factor of boosted confidence of the CPC in the past year, amidst developments such as the development of a 7 nanometer chip by Semiconductor Manufacturing International Corporation (SMIC), a Chinese fabrication company, just a few months ago, as well as other strides in the application of Artificial Intelligence technology in defence. It could also mean that there is now a focus on strengthening innovation and advancement in core technologies in China has already demonstrated capabilities in.
Domestically, the stance on financial policy has remained the same, which is, following a “prudent monetary policy” and a “proactive fiscal policy.” The latter was also reiterated at the Central Financial Work Conference that took place just a month ago and has now become part of the implementational mandate of the newly established Central Finance Commission led by Premier Li Qiang. Under ‘proactive fiscal policy’, in the past year, China has mobilised tools such as tax rebates for medium and small enterprises, as well as interest rate discounts for local governments. This is to enable them to alleviate some of the debt stress and continue to invest either in keeping employees on a regular payroll (which applies to MSEs) or in unhindered development of infrastructure (which is applicable to local governments).
The idea of easing local government finance vehicle (LGFV) debt, for example, was broached at the Politburo meeting held in July this year, where it was declared that a debt-relief package was essential at the local and regional governments’ level. By October, the Standing Committee of the National People’s Congress approved a special bond issuance worth CNY 1 trillion to select local governments in the aftermath of several natural disasters like floods and typhoons, so that their post-disaster recovery and infrastructural resilience plans continue as normal. This was, of course, not a direct LGFV bailout, but provided room above-budget for funding-impaired local governments that also faced the brunt of disaster recovery.
But at the same time, the 2023 CEWC readout has issued a fair warning to local authorities, that they have to become accustomed to frugality. This has been coupled with a warning notice on strict supervision of financial discipline. It is no secret that amidst flailing domestic private investment which gave a boost to provincial government funds for their infrastructure projects, the debt burden on local authorities has increased. Although numbers differ, the recorded LGFV debt in China is somewhere around $60 trillion. This debt is inclusive of loans, bonds, and shadow bank borrowing. And so, the highlight of the economic policy in this regard will not be bailouts, but mere “fiscal sustainability.”
The monetary policy is to follow a similar approach, where the levels of liquidity in the economy are to be stabilized, and excessive infusion of liquidity is to be avoided. This is unlike what was promised by former Chinese Vice Premier Liu He at the Davos Forum at the very beginning of this year, where he vowed to give a “blood transfusion” to the economy. This is, however, not to say that the attention on stability isn’t prudent, given that Yuan has depreciated 8% against the dollar in 2023. The sentiment was different in January when the currency peaked in the aftermath of the scrapping of the Zero-COVID policy. Moreover, critical factors such as lack of income confidence, increasing unemployment against rising age dependency ratio, stagnation of household savings at a high point, and capital outflows exacerbated by geopolitical hostility, all indicate that injecting more liquidity will do no good as overall investment and borrowing sentiments are in decline.
Finally, to alleviate some of the economic concerns caused by capital flight and geopolitical competition, in addition to reiterating self-reliance and domestic consumption-led growth, the 2023 CEWC has made the interesting provision to “promote balanced trade” to “increase international demand.” It seems from this statement that China is willing to take some of the fences down vis-a-vis access to its market for its key trade partners (especially the European Union, which is now increasingly emphasizing “de-risking”). In doing so, trade may become more “balanced” and not necessarily lop-sided in China’s favour. It not only helps China to continue on the path to “opening-up,” which has been called for many times in the CEWC readout, but also fulfills the two-pronged goal of enabling China’s high-quality growth and circumventing any real decoupling. At the same time, it allows China to focus its crunched resources on self-reliance in key verticals such as high technology and food insecurity, where geopolitical contestation with the U.S. is unlikely to let up anytime soon.