Economic funk and Taiwan sabre-rattling: five takeaways from China’s NPC

China’s principal annual economic showcase got underway on Monday, in the form of the National People’s Congress and the Chinese People’s Political Consultative Conference, together known as the “Two Sessions”. 

Delivering the government’s “work report” at the NPC’s opening session, Premier Li Qiang on Tuesday reviewed China’s economic performance in 2023, and set out targets for the coming year. 

With the country’s plans under scrutiny given the country’s lacklustre economic performance over the past five years, here are the key talking points from the “Two Sessions” so far. 

No imminent return to the era of high growth 

Long seen as the main engine of the global economy, China’s growth has sputtered in recent years (see chart), held back by flagging demand for its exports, reduced productivity and a collapsing real estate sector. 

The government’s target for economic growth of “about 5 per cent” for 2024, in line with last year’s figure, is an ambitious one, according to Capital Economics, with the consultancy predicting growth of closer to 4.8 per cent. 

The intentionally loose growth target can be seen as a face-saving exercise for the benefit of an international investment community growing increasingly concerned about the government’s grip on the economy. 

Lower growth projection figures of 4–4.5 per cent would have drawn a negative reaction from markets, says Lin Li, head of global markets research for Asia at Mitsubishi UFJ Financial Group.

Indeed, Li notes that growth targets from individual provinces are “noticeably lower than last year”, pointing to an inconsistency between the national gross domestic product growth target and provincial numbers.

Notably, this year’s work report stopped short of signalling another round of large-scale stimulus as seen in 2009/10, 2015/16 and 2020.

“It seems that policy makers have concluded, quite reasonably, that the sugar rush from another round of large-scale stimulus would not be worth the medium-term costs,” according to a Capital Economics note. 

“But they also seem to believe that major support is not needed to put a floor beneath growth, at least judging by the ambitious economic targets set for 2024.” 

In the absence of such a stimulus, the government is to issue Rmb1tn ($138.bn) in “ultra-long” special treasury bonds to provide funding for major projects aligned with national strategies. The government will also issue Rmb3.9tn of special-purpose bonds for local governments, up by Rmb100bn compared with 2023.

Limited help for the beleaguered real estate sector

China continues to suffer under the weight of a collapsing real estate market, with a government crackdown on high debt levels among real estate developers leading to a string of bankruptcies, notably that of the country’s second-largest developer Evergrande in January.

Yet, while the work report prioritises defusing risks in the property sector alongside urban regeneration, it is light on concrete measures, with reference to the property sector “embedded within the risk management paragraphs” of the report, says Li. 

The government talks of plans to expedite the establishment of its new model for the real estate sector, intending to boost affordable housing and optimise the sector’s supply and demand balance.

As part of this, China is looking to “increase bank lending and not discriminate against the private developers” in line with the government’s recent policies, says Li. 

Indeed, the government promises to refine real estate policies and meet financing demands of property developers “under various forms of ownership on an equal basis”, according to the work report.

“In many respects, this is a shift in policy that has already taken place,” according to Capital Economics, which notes that more than 200 cities have set up “real estate financing co-ordination mechanisms” which pair banks with individual projects that have been “whitelisted” by China’s housing authority, as part of a government initiative to improve liquidity in the housing sector.

“This earmarking of specific schemes to banks may make it harder for banks to drag their feet as they have when asked to extend more credit to developers in the recent past,” adds Capital Economics. 

China welcomes foreign investment... please

The work report unsurprisingly revealed the government’s drive to “intensify efforts” to drive foreign investment, with foreign-funded companies being able to more easily participate in government procurement, bidding and standard-setting on an “equal footing”. 

The welcoming rhetoric follows President Xi Jinping’s goal of improving foreign investment access to the country’s manufacturing sector, announced in October, after sluggish economic growth and office raids of private sector firms prompted a retreat by overseas investors. 

According to this year’s work report, foreign investment restrictions on the manufacturing industry will be removed, while market access in telecommunications, the medical sector and other service industries will be relaxed, with formerly isolated services sectors “opened up”, says Li. 

In deepening multilateral, bilateral and regional economic co-operation, China will work towards joining the Digital Economy Partnership Agreement and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, the report says.

As such, the broadly downward trend for foreign direct investment in China is likely to reverse, driven not only by China’s domestic policy — which makes more foreign investment clear — but also the impact of upcoming US monetary policy, says Li, with increased foreign investment for China likely to become evident by the second half of this year.

While welcoming the announcement of reforms, Sean Stein, chair of the Beijing-based American Chamber of Commerce China, told Reuters that “the key, as ever, will be full and timely implementation”.

Taiwan rhetoric hardens as defence spending surges

Defence spending has been a reliable source of growth in recent years amid the sluggishness in the broader economy, more than doubling over the past decade. That trend is set to continue into 2024 with the defence budget rising by 7.2 per cent to Rmb1.67tn ($232bn). 

Alongside the increase came a notable hardening of the government’s language relating to Taiwan; while previous reports have spoken of a “peaceful reconciliation” with the independently governed island, China’s finance ministry’s annual report calls for reunification, noting that it wants to “be firm” in such a process. 

Such rhetoric echoes that of high-ranking Chinese Communist party official Wang Huning, who said in February that China planned to “resolutely combat” any sign of Taiwan independence in 2024.

The uptick in rhetoric comes after the election in January of Lai Ching-te, described by China as “a dangerous separatist”, as Taiwan’s next president. He is due to be sworn in in May. 

“China is showing that, in the coming decade, it wants to grow its military to the point where it is prepared to win a war if it has no choice but to fight one,” Li Mingjiang, a defence scholar at the S. Rajaratnam School of International Studies, told Reuters.

The work report also referenced China’s role in international tensions elsewhere; the situation in Israel and Palestine will be a key focus in China’s foreign policy moving forward, the government suggests.

Driving consumption, going green

Co-ordinated policies look to drive domestic consumption of goods and services, while development could take a greener turn. 

With a year-long programme launched to stimulate domestic consumption and an additional Rmb700bn investment from China’s central government budget, consumption will likely reach a “healthy growth” of 7 per cent this year, according to analysis from HSBC.

Greater demand may focus on housing appliances and automobiles, as well as services like catering and tourism — industries which outperformed last year — ING analysis suggests.

Alongside domestic growth plans, the government has proposed a 2.5 per cent decline in energy consumption per unit of GDP, as part of wider efforts to advance the country’s “energy revolution”, the work report says.

China also plans to enhance ecological conservation and promote green and low-carbon development, according to the report. “The direction for development is greener,” Li says, as the NPC pushed forward on the government’s low-carbon development agreement, in line with wider carbon neutral goals and China’s 14th five-year plan.

As the NPC continues, international onlookers and investors may continue to await greater signs of certainty in China’s economic data. In the meantime, the world’s second-largest economy must not be complacent about its growth targets, Li says, which could prove challenging.