China’s ‘two sessions’ 2024: Have new pressures already fractured last year’s economic model?

China’s political elite will gather next week for the country’s annual legislative sessions, where plans will be set for the country’s economy, diplomacy, trade and military. In the second part of the series, Frank Chen and He Huifeng examine how Beijing will guide its economy through uncharted waters.

Though it is typically a time for warmer weather, this spring could bring a chill to China’s previously sizzling industries – particularly new energy – as hopes for a banner year of economic growth may not come to fruition if overcapacity concerns and strained trade relations prove enough of a hindrance.

“Prices began to tumble last year, as demand is not holding up when more products flood the market. Many that were thinking of expansion now have to do the opposite to survive,” said Mark Ma, a senior executive at a medium-sized photovoltaics (PV) component integration company in Guangdong province.

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“The average unit price of PV panels has [taken a dive], from 1.8 yuan a year ago to 0.8 yuan (US$0.25 to US$0.11),” Ma said, adding the sector’s already thin margins would likely see a further squeeze this year.

Despite China gaining a prominent position in the global solar panel and electric vehicle (EV) markets, sentiment has weakened and worries of overinvestment are on the rise. As a result, those industries may not be able to play an outsize role in supporting economic growth – at least, not as much as they did last year.

This makes sustaining relatively high growth of gross domestic product (GDP) in 2024 a more difficult prospect after last year’s expectation-beating 5.2 per cent rise. It also raises questions over how far Beijing will reach into its toolbox to address other persistent drags on the economy – most prominently, a slump in the property market and deflationary risks – while creating more jobs and spearheading tech innovation.

China is widely expected to announce an ambitious GDP growth target this year, with most analysts anticipating Premier Li Qiang will set a goal of 5 per cent when he delivers his first government work report at the opening of the National People’s Congress on March 5.

Beijing needs to ... demonstrate to domestic and foreign businesses what China will do and how they can help
Fu Weigang, Shanghai Institute of Finance and Law

The congress, a meeting of the country’s top legislature, will be held at the same time as the annual gathering of the national advisory body – a period collectively known as the “two sessions” on the Chinese political calendar.

In his report, Li will lay out the country’s plans to tackle local protectionism, cope with deepening demographic challenges, realign its focus on tech and other innovative industries, deal with US trade containment and avoid the middle-income trap.

Leaders are also likely to leverage the gatherings to respond to oft-cited concerns that have undermined China’s appeal for investors, such as unpredictable policies, a lack of decisive reform and an overemphasis on national security.

“Beijing needs to flesh out a clear road map and systematically demonstrate to domestic and foreign businesses what China will do and how they can help and benefit. The two sessions will be a good occasion,” said Fu Weigang, an executive director with the Shanghai Institute of Finance and Law.

Mindful of side effects which are still being dealt with – ballooning local government debts and overcapacity – Beijing has refrained from a “bazooka-style” stimulus of the sort used to blunt the effects of the global financial crisis in 2009 and 2010.

A similar 4 trillion yuan (US$555.7 billion) spending package is not on the cards. Instead, the country has shifted focus to what it terms “new productive forces” – areas which align with systemic advantages and carry enormous upside potential – as the catalyst for future growth and development.

The rather limited stimulus we’ve seen so far is not enough for the 5 per cent goal
Alicia Garcia-Herrero, Natixis

Fu said the experiences of many local regions shows that transition could happen without the economy losing speed, but cautioned that “growth could be slowed by the lack of transition and reforms”.

Alicia Garcia-Herrero, chief economist for Asia-Pacific at Natixis, said the Chinese economy would likely muddle through 2024, forecasting a more modest level of growth at around 4.5 per cent.

“The rather limited stimulus we’ve seen so far is not enough for the 5 per cent goal,” she said. “Early data for January doesn’t look good either, and the first quarter will be underwhelming. Beijing will have to push harder.”

Quick fixes like those previously proposed are unsuitable to repair structural problems in the economy, analysts warned, adding that with China embroiled in a “reform stasis”, the growth figures for this year could end up off-target.

“The best-case scenario is that China’s growth for 2024 is 4.5 per cent, and it may still maintain a 4 per cent clip per year before 2030 without optimising its socioeconomic systems,” said Tomoo Marukawa, a professor of economics at the University of Tokyo.

“But potential growth will plunge to 2.8 per cent in the 2030s. There’s a possibility that China will not be able to reach its [growth] potential due to policy mismanagement.”

More supportive fiscal policy is one option to move this year’s target closer to the realm of possibility. The on-budget deficit goal is likely to be set at 3 per cent of GDP, with the issuance of one trillion yuan in central government special bonds and 4 trillion yuan in local government special bonds, Goldman Sachs said in a research report.

Beijing issued 1 trillion yuan of special treasury bonds in October, which lifted the country’s fiscal deficit ratio to 3.8 per cent from the previously budgeted 3 per cent.

Lawmakers may discuss the government’s new model for the property sector, local government financing and fiscal reforms, the investment bank said, as well as demand-side stimulus to motivate consumption.

Local governments have unveiled a number of infrastructure projects to get the year off to a good start, but analysts warned such behaviour is not sustainable over the long run.

“Focus on yet more supply-side stimulus risks worsening overcapacity and deflation, and increases reliance on external demand. It is also shifting the structure of the economy toward the state sector, which suggests the quality of capital allocation and returns on investment will decline,” said Gavekal Dragonomics in a January research report.

In addition, a cooling US economy and a saturated Russian market may not offer much in terms of export destinations. Last year’s figures already saw a drop, 4.6 per cent year on year in US dollar terms.

After overseas shipment of EVs, lithium batteries and solar cells rose 29.9 per cent last year in yuan terms, China has expressed an interest in using these “new three” goods to drive exports and growth. But with major economies on both sides of the Atlantic moving to shut Chinese imports out, and excess supply creating a glut of these items in friendlier markets, desires may fade.

“Beijing clearly views the ‘new three’ as the way forward, but I don’t think the world will take much more because [such goods] already command a huge market share overseas, with two-thirds of production exported,” said Garcia-Herrero of Natixis.

“To keep up growth, the ‘new three’ export drive would imply further penetration into open markets. But we see that the US is no longer open. Europe will probably no longer stay open,” she said.

EV restrictions from US, EU could throw a wrench into China’s recovery plans

The European Union has begun a probe into EVs of Chinese make, alleging prices are being kept “artificially low”, and the bloc is also imposing stricter climate and sustainability compliance rules for EVs and their batteries. The US is mulling a move, too – Commerce Secretary Gina Raimondo said in January that Chinese EVs could present a data security risk.

A wave of PV module exports from China has also triggered calls to action in Europe, as the continent tries to shine more light on clean energy sourcing while shedding reliance on Chinese suppliers.

“The US and EU will not allow Chinese manufacturers to rise from marginal suppliers to dominant players. They will use all measures, from anti-dumping tariffs to economic security laws, to prevent that from happening,” said Marukawa of the University of Tokyo.

A clutch of new policies handed down by Beijing since last summer, including a dedicated private economy bureau and a complaint platform for foreign firms, has yet to substantially revive sentiment.

Private investment dipped 0.4 per cent year on year in 2023, and that of foreign firms rose a mere 0.6 per cent. Both lagged behind a rise of 6.4 per cent observed in the state sector, according to official data.

Confidence among many small firms is hanging by a thread, said Peng Biao, a Guangzhou-based supply chain analyst tracking clothing and textile producers.

She said “90 per cent” of the small firms she had surveyed indicated their outlook for 2024 is still weak.

“For instance, many will only have a shoestring budget to attend three to five exhibitions this year, when in the past most would go to 10 trade shows, and would only net small orders,” Peng said.

She added that cutting costs would be their first priority, as many would slash headcount and production in the absence of sizeable orders.

Chinese investment bank joins growing chorus calling for direct fiscal stimulus

“When business dries up at home, many [would] contemplate setting up plants abroad this year, but that’s a challenge when you have meagre profits,” she said.

And despite Beijing’s efforts – broadcasting pro-business messages in a pointed charm offensive – it has had trouble recreating the environment which gave it a hypnotic allure for overseas investment.

Foreign capital has turned to other markets, spooked by heightened geopolitical tensions and other factors, pushing the country’s annual net receipt of foreign direct investment (FDI) to a 30-year low in 2023, according to data released by the State Administration of Foreign Exchange.

Data from the Ministry of Commerce also indicates a reversal remains far from view, as FDI inflows dropped to 112.7 billion yuan in January, a 11.7 per cent fall year on year.

With national security remaining at the forefront of political life, analysts warned, any rhetoric intended to instil confidence in the private sector will be diminished. This trend showed no signs of change, with the most recent meeting of the Communist Party’s Politburo heavy on ideology.

“The rising weight of political ideology in policymaking depresses investments by Chinese and foreign firms alike,” argued Rhodium Group and the Atlantic Council in their China Pathfinder Report, “because it reduces the net present value of business opportunities by adding unmanageable risks.”

Though China won’t slip into chronic deflation overnight, policymakers need to accept the rising threat and actuate reforms now
Tomoo Marukawa, University of Tokyo

The two research houses echoed other long-standing concerns in the January report. “Policymakers did next to nothing to tackle real structural problems,” they said. “Long-term growth potential will disappoint until fundamentals are addressed ... Beijing must soon acknowledge that slower growth, in the 3 to 4 per cent range, is here to stay.”

Beijing may have to brace for slower growth than previous years no matter what, as prospects have also been weakened by an ageing, shrinking workforce as well as low demand. Another looming challenge is the threat of a “lost decades” period of stagnation, of the type which has struck Japan.

China’s consumer price index fell for the fourth month in a row in January – the steepest drop since September 2009 – while factory-gate prices declined for a 16th straight month.

“China’s development level is way below where Japan was when its deflation began in the 1990s. Though China won’t slip into chronic deflation overnight, policymakers need to accept the rising threat and actuate reforms now,” urged Marukawa of the University of Tokyo.

He did add, however, that if Beijing is able to manage issues well, China would march into the cohort of high-income nations within a few years.

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