The big takeaway from the opening day of the NPC on Monday, when Premier Li Qiang delivered the government work report, is that there is a sizeable gap between the ambitious GDP growth target of “around 5%” and the stimulus that Beijing is prepared to implement, at least for now (see our write-up HERE).
Such an outcome was the basecase of our preview report for the NPC last week (link HERE). Our call was based on the core tension facing China’s economic team. They are caught between a desire to boost growth and confidence on the one hand, and on the other Xi Jinping’s directive to adhere to “high quality development” – that is, to maintain financial discipline and focus on advancing strategic priorities such as technological self-reliance.
In a press conference on Tuesday, the heads of major Chinese agencies defended the realism of the growth target but offered no new pledges of stimulus. The head of the National Development and Reform Commission (NDRC), said that the goal would be achievable “with a positive attitude and hard work.” But for the second straight year, Xi used a speech to a provincial delegation at the NPC to essentially tell local officials to slow down. This should be a counterpoint to any conclusion that Beijing is gearing up for an all-out growth push.
On the second day, Xi spoke
Xi’s speech, to the NPC delegation from Jiangsu province, was widely disseminated in the state media and sends an important signal about Xi’s priorities.
The core theme was “new quality productive forces,” a recent buzz phrase that boils down to pursuing high-efficiency rather than resource-intensive growth, led by innovative manufacturing. But the most notable aspect was Xi’s prominent warning for local officials to “avoid blind rushes and bubbles” when investing in new industries. They should “adhere to reality” and adapt their strategies to local conditions (rather than just pursue the latest investment craze).
This is the first time Xi has spoken out so forcefully on the risks of excessive investment in new sectors. It comes amid concerns within China and especially abroad that Beijing’s push to develop new growth drivers to replace property investment has resulted overcapacity in the clean tech sector (electric vehicles, batteries, solar) and threatens to do the same in other priority sectors such semiconductors. (Is it possible to have overcapacity in artificial intelligence? We may be about to find out). The EU has threatened trade action in response to a surge of EV exports from China, and the issue is rising to the top of Washington’s trade policy agenda.
To be clear, Xi has no angst about the party/state directing the allocation of capital in the economy and putting strategic goals above profits. He has only a little sensitivity to trade partner concerns. His main concern is that local officials may be squandering financial resources (worsening their debt problems) without really delivering the goods in terms of breakthrough technologies. It is a familiar center-local issue for Xi: provincial officials are blindly pouring capital into sectors that Beijing has identified as strategic, knowing that this a politically safe way to boost local economic activity and hit GDP targets. Xi is of course partly responsible for this dynamic by fostering a top-down political environment, focusing obsessively on advanced manufacturing, and restricting local officials (for some good reasons) for relying on the traditional growth vehicles of property and infrastructure investment. He still wants them to invest, but to do so rationally.
There are two practical implications of his speech, both of which underscore the growth challenges for 2024:
First, investment in advanced manufacturing is clearly hitting headwinds. The fact that even Xi is warning about excessive investment in hot sectors implies the situation is getting serious. An aggressive pullback in investment is unlikely: these sectors are too important for Xi’s economic and geopolitical aims, and the incentives facing local officials are powerful. However, it does seem likely that the central government will more closely scrutinize projects by local officials, and that the pace of investment in sectors such as electric vehicles will decelerate this year (if stay at relatively high levels). PBOC Governor Pan Gongsheng also pledged on Tuesday to restrict lending to overcapacity sectors. This scrutiny is important because investment and production in these sectors, particularly EVs, helped to offset some of the economic impact of the decline in property investment last year and to sustain China’s demand for metals and electricity. Advanced manufacturing not be able to step into the breach again, even as property shows no signs of bottoming out.
Second, Xi’s is sending a political signal is that local officials should not obsessively chase their GDP targets. At the 2023 NPC, he told the delegation from Jiangsu that local officials should not “rush into major actions hastily” in the name of hitting short-term targets. Western media and analyst commentary mostly missed this signal, but it was another tip-off that Beijing was not going to aggressively pursue a post-Covid rebound. That core message hasn’t changed.
