What does China’s 2024 economic policy look like?
Context- The Chinese Central Economic Work Conference (CEWC) of 2023, a yearly gathering of the Communist Party that sets the economic course for the forthcoming year, wrapped up on December 12. The meeting’s summary emphasizes a stable trajectory for China’s economy in 2024. The strategy, as gleaned from the CEWC discussions, appears to be well-defined - transitioning from an export-driven to a domestic demand-driven economy, enhancing the quality of production, striving for self-sufficiency in vital technology while cooperating with trade partners when needed, and maintaining financial discipline along with fund and liquidity stability.
It’s worth noting that while many of these objectives have been reiterated over the past few years, some necessitate profound structural changes, including the abandonment of long-standing ideologies and practices of the Chinese party-state.
How is China strategically addressing the challenges?
- Starting off, the 2023 CEWC recognized that China is indeed moving past three years of turbulent economic policy planning during the COVID-19 Pandemic, now focusing on economic recovery in crucial sectors.
- The first significant area in this context is dual circulation. With global demand continuing to fall due to rising protectionism and ‘de-risking’ sentiments, leaving China’s manufacturing sector’s overcapacity unresolved, the nation is now turning inward to stimulate domestic consumption and maintain a supplementary relationship with international demand.
- Chinese President Xi Jinping has termed this the “New Pattern of Development,” a bold structural reform for a country recognized as the world’s manufacturing hub.
- Therefore, it’s probable that the country will place more emphasis on domestic demand as the primary driver of economic growth in the future, with international demand serving as a supplement.
What specific measures or strategies are being implemented?
- The shift towards domestic demand has underscored the idea of “high-quality” economic growth, that is, growth that is supported by quantitative success but not overshadowed by it. For the CPC, resolving the primary economic and developmental contradiction of the century is crucial for maintaining domestic legitimacy.
- Under Mr. Xi, the main contradiction lies between unbalanced and inadequate development and the people’s ever-increasing desire for a better life.
- Naturally, the aspiration for a better life has become the cornerstone for high-quality growth, along with the need to concentrate resources on specialized self-reliance, which is being driven by U.S.-China geopolitical competition and falling exports.
- The emphasis is now on invigorating research and development in sectors that require high-quality growth, such as high-technology and sustainable manufacturing, while the CEWC readout has made minimal provisions for low-end manufacturing segments.
- However, agriculture continues to be a focus, given its contribution of about 7.3% to the Chinese GDP and about 5% to GDP growth (both as of 2022).
- Furthermore, incentives linked to agriculture align with other policy objectives such as “rural revitalisation” and food security. Simultaneously, the economic plan aims to technologically enhance agriculture through the establishment of “agriculture innovation centers.”
- Achieving self-sufficiency in key technologies remains a recurring and explicit objective for the rejuvenation of China’s economy, against the backdrop of escalating tech-related export restrictions imposed by the U.S. and its issue-based and treaty-based allies (like the Netherlands and Japan) against China.
- However, the terminology in the CEWC readout has shifted from “self-improvement” in high-tech in 2022 to “strength” in 2023.
- Speculatively, this transition from self-improvement to demonstrating strength could be attributed to the CPC’s increased confidence over the past year, following developments such as the creation of a 7-nanometer chip by the Semiconductor Manufacturing International Corporation (SMIC), a Chinese fabrication firm, a few months ago, as well as other advancements in the use of Artificial Intelligence technology in defense.
- It could also suggest a new emphasis on bolstering innovation and progress in core technologies where China has already shown capabilities.
- On the domestic front, the approach to financial policy has remained consistent, adhering to a “prudent monetary policy” and a “proactive fiscal policy.” The latter was also reaffirmed at the Central Financial Work Conference held just a month ago and has now become part of the implementation mandate of the newly formed Central Finance Commission, led by Premier Li Qiang.
- Under the ‘proactive fiscal policy,’ China has utilized tools such as tax rebates for medium and small enterprises and interest rate discounts for local governments in the past year.
- This is to help them alleviate some of the debt pressure and continue to invest, either in maintaining regular payrolls (applicable to MSEs) or in uninterrupted infrastructure development (applicable to local governments).
- The concept of alleviating the debt of Local Government Finance Vehicles (LGFV) was introduced at the Politburo meeting in July this year, where it was stated that a debt-relief package was crucial at the local and regional government levels.
- By October, the Standing Committee of the National People’s Congress had sanctioned a special bond issuance of CNY 1 trillion to selected local governments following several natural disasters such as floods and typhoons, ensuring their post-disaster recovery and infrastructure resilience plans could proceed as planned. This wasn’t a direct LGFV bailout, but it provided additional budgetary room for financially strained local governments also dealing with disaster recovery.
- However, the 2023 CEWC readout has also issued a stern warning to local authorities, advising them to adapt to frugality. This was accompanied by a cautionary notice on strict financial discipline enforcement.
- Amidst dwindling domestic private investment, which previously bolstered provincial government funds for their infrastructure projects, the debt load on local authorities has escalated.
- While the figures vary, the recorded LGFV debt in China is approximately $60 trillion, encompassing loans, bonds, and shadow bank borrowing. Therefore, the focus of the economic policy in this context will not be bailouts, but rather “fiscal sustainability.”
- The monetary policy is set to adopt a similar strategy, aiming to stabilize the economy’s liquidity levels and avoid an overabundance of liquidity. This contrasts with the pledge made by former Chinese Vice Premier Liu He at the Davos Forum earlier this year, where he committed to providing a “blood transfusion” to the economy.
- However, this doesn’t imply that the focus on stability isn’t judicious, especially considering the Yuan’s 8% depreciation against the dollar in 2023.
- The mood was different in January when the currency reached its peak following the abandonment of the Zero-COVID policy.
- Furthermore, key factors such as a lack of income confidence, rising unemployment versus an increasing age dependency ratio, a stagnation of household savings at a high level, and capital outflows worsened by geopolitical antagonism, all suggest that adding more liquidity would be unproductive as overall investment and borrowing sentiments are declining.
- Lastly, to mitigate some of the economic worries caused by capital flight and geopolitical rivalry, the 2023 CEWC, in addition to reemphasizing self-reliance and growth led by domestic consumption, has introduced an intriguing provision to “promote balanced trade” to “increase international demand.”
- This statement suggests that China is prepared to remove some barriers to its market for its key trading partners (particularly the European Union, which is increasingly advocating for “de-risking”). In doing so, trade may become more “balanced” and not necessarily skewed in China’s favor.
- This not only aids China in continuing its “opening-up” journey, which has been repeatedly called for in the CEWC readout, but also achieves the dual goal of facilitating China’s high-quality growth and avoiding any actual decoupling. Simultaneously, it allows China to concentrate its limited resources on self-reliance in key sectors such as high technology and food security, where geopolitical competition with the U.S. is unlikely to ease anytime soon.
Conclusion- China’s economic policy for 2024 is geared towards transitioning from an export-driven to a domestic demand-driven growth model, enhancing the quality of production processes, attaining independence in crucial technology while cooperating with trade partners when required, and maintaining financial discipline in conjunction with the stability of funds and liquidity in the future.