With the annual meeting of China’s parliament looming next month, its leaders face unprecedented pressure to make decisive policy choices. These decisions must not only address immediate concerns but also safeguard the long-term growth prospects of the economy. The upcoming decisions are crucial, marking a period of heightened scrutiny for China’s leadership in nearly a decade.
At the beginning of the year, Chinese stocks plunged to five-year lows amid growing concerns about economic growth. Simultaneously, deflation reached levels unseen since the global financial crisis. These developments sparked comparisons to the 2015 turmoil, compelling policymakers to take decisive action.
“The last time the Chinese leadership faced this kind of pressure was in 2015,” said Tommy Wu, a senior China economist at Commerzbank. He added that 2024 is a crucial year for China to stabilize the economy.However, the current situation is significantly more complicated.”
To overcome the 2015 crisis, China actively devalued the yuan, tightened its capital account to prevent outflows, and invested substantially in real estate and infrastructure. Additionally, the country implemented a significant cut in interest rates, exceeding 100 basis points.
Nevertheless, the policy ammunition available has been depleted, bent, or broken. This situation severely restricts the government’s capacity to address a faltering economy and navigate a seemingly self-feeding downward spiral in consumer and investor confidence, along with economic growth challenges. The depletion of effective policy tools underscores the urgency of finding alternative strategies to reverse the current economic downturn.
Since 2021, the property market has experienced a free fall, attributed to a succession of defaults by developers who made overleveraged, poor investments over the years. Amidst this downturn, maintaining infrastructure spending proves challenging, given the elevated levels of local government debt. The interconnected challenges of the property market decline and strained infrastructure funding create a complex economic scenario.
Monetary policy easing poses a risk of triggering a run on yuan assets, as it widens the interest rate differential with other economies. This, in turn, exacerbates deflationary pressures as cheap credit flows into China’s overcapacity-ridden industrial complex.
Commencing its annual meeting on March 5, China’s National People’s Congress (NPC) shows no signs of major stimulus or a grand reform plan. The absence of such initiatives raises questions about the government’s approach to addressing economic challenges during this crucial event.
“It is widely underappreciated how constrained Beijing is at this point, in terms of options to stimulate the economy via fiscal policy, or through more rapid credit growth from banks,” said Logan Wright, a partner at Rhodium Group.
“There will be no policy bazookas unveiled at the NPC, in part because China has no good options to maintain growth via its traditional channels.”
‘STUCK BY CHOICE’
Expressing frustration, fleeing investors highlight the lack of a clear roadmap from authorities. Last year, structural issues surfaced when the Chinese economy failed to replicate the rapid recovery seen in other economies after COVID-19. The absence of a comprehensive plan for addressing these concerns contributes to investor uncertainty.
Markets demand clear, long-term plans for the real estate sector’s cleanup, restructuring municipal debt, and transitioning to a sustainable growth model. These initiatives should pivot towards household consumption rather than relying on debt-fueled investment excess. Establishing comprehensive strategies in these areas is crucial for fostering market confidence and stability.
The NPC is not conventionally the platform where Chinese leaders announce significant policy shifts; instead, such announcements are typically reserved for events called plenums. These plenums are conducted by the ruling Communist Party between its five-year congresses. This underscores the distinct roles and functions of the NPC and the Communist Party’s plenums in shaping and communicating key policy decisions.
Initially expected in the final months of 2023, one such plenum, crucial for policy decisions, may still take place in the near future. However, the fact that it has yet to be scheduled has heightened investor concerns about policy inaction. The uncertainty surrounding the timing of the meeting adds to the challenges faced by the financial markets.
Premier Li Qiang is anticipated to present his annual work report to the NPC, outlining the year’s economic targets. These targets encompass a 5% growth target for 2024 and a budget deficit goal of 3% of GDP.
Nevertheless, analysts caution that establishing a target akin to last year’s, without implementing new policies to reallocate resources from infrastructure and manufacturing investment to households, poses a risk of undermining confidence rather than enhancing it. This underscores the importance of strategic policy adjustments to ensure sustained economic confidence.
Fathom Consulting notes a decline: every ten yuan invested in China now yields 0.2 yuan output, down from 2.1 in 2002.
More than a year after China’s COVID lockdowns ended, consumer confidence remains at a record low.
“There is a lack of investor confidence and business confidence. But the root cause of this is consumer confidence,” said Joe Peissel, an economic analyst at Trivium China.
“The most effective way to deal with this is through reforms that put more cash in consumers’ pockets. However, (President) Xi Jinping has previously aired an antipathy toward cash transfers or generous social security provision, so this is unlikely.”
Economists and investors are urging the implementation of rebalancing policies that Xi proposed in 2013. However, China’s failure to adopt these measures has led to a faster rise in debt levels compared to economic growth.
Some analysts assert that concerns about the disruption caused by a different development model have led policymakers to prioritize social stability and national security over growth sustainability. This shift in priorities is seen by some as a strategic response to potential challenges in the pursuit of a sustainable growth trajectory.
This would occur because such measures benefit consumers and private businesses at the expense of the government sector.
“A big shift now would acknowledge serious long-term mistakes – that’s unlikely,” said Derek Scissors, a specialist in China’s economy at the American Enterprise Institute.
“China is stuck, by its own choice.”
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