While many of us are trying to piece together the details of a trade deal between China and the US, which Presidents Xi Jinping and Trump would have to agree eventually, the focus this week is on important meetings taking place in Beijing.
It is the first week of the so-called ‘Two Sessions’, the annual event comprising the Chinese People’s Political Consultative Conference – the body that advises the government on policy matters – and the National People’s Congress, which is China’s equivalent of a parliament. The latter convenes about 3000 party delegates to debate, sometimes amend, but usually rubber-stamp already widely circulated and debated policies for the coming year.
This time last year, the NPC was the forum from which President Xi Jinping emerged with presidential term limits abandoned, and China-watchers acknowledging that he was “unassailable”, “omnipotent” and so on. After a difficult year, in which Xi has faced disquiet at home over his policies and approach to the US, and the economy has slowed down significantly, the tenor of this year’s opening report to the NPC by Premier Li Keqiang today was decidedly downbeat.
As always, the Work Report outlined accomplishments over the past year, and set out tasks – 64 in all – for 2019. Some of these are specific policy measures, most are bland declarations or slogans. Overall though, the government’s position is unchanged. It is concerned about slower growth at home and continues to emphasise that job creation is its major priority, but it also says that it needs to pay attention to enduring financial stability, as well as environmental issues, poverty reduction, and industrial and technological transformation.
Digging a bit deeper, it is clear that the government’s employment and growth objectives – it has set a target of 6-6.5 per cent this year following growth in 2018 of 6.6 per cent, officially measured – are not compatible with policies of monetary and credit restraint that it plans to observe. This conflicted position, moreover, coupled with the repercussions of the trade war with the US, cast something of a shadow over the realisation of other economic and social objectives.
The government is, nevertheless, planning to stimulate the economy. The official budget deficit is predicted to rise slightly to 2.8 per cent of GDP this year, with about RMB2 trillion ($300 billion) of tax cuts (mainly VAT for manufacturers) and lower industrial electricity, internet and mobile communications charges compensated to a degree by reductions in non-infrastructure public spending. Private firms will also be given some relief from paying into pension and social funds.
These fiscal numbers are opaque and misleading, however: China is not trying to observe the Maastricht fiscal straitjacket. Once we add in the doubling of bond issuance by local governments to finance infrastructure and other off-budget funds, the budget deficit is likely to be nearer 5 percent of GDP.
With a beady eye on the trade negotiations and what the US negotiators are after – or at last were – there was considerable interest in what Li would say about economic reforms, and in particular about the new fast-tracked foreign investment law, due to be voted on next week. In the event, we didn’t learn anything new. It is long on pronouncements and short on details.
It purports to bar local governments from requiring foreign companies to transfer technology to domestic partners, but says nothing about central government, or other compliance and monitoring regulations that have a comparable effect. Nor does it offer proper assurances about intellectual property infringement or theft of relevance to tech firms in particular, or satisfy long-standing requests from foreign firms about equal fiscal and regulatory treatment.
We should not be surprised. Even though there may be some incremental changes in regulations, and the contentious Made in China 2025 industrial strategy wasn’t even mentioned in the law or Li’s speech, there is no real possibility that China is willing to put its industrial and technology strategy on the table for meaningful negotiation. Chinese companies, and state entities will continue to find favour and privilege, held back from foreign competitors.
As far as the Chinese economy goes, the government’s measures are likely to succeed in stabilising the downward drift that’s been going on for many months – certainly in time for the 70th anniversary of the founding of the People’s Republic in October. Yet those efforts may require more policy stimulus than laid out this week, they probably won’t spark an economic revival as such, and in the bigger scheme of things, they are not so relevant. No one doubts that the state can throw money at the economy in ways that most Western economies find difficult nowadays. But that’s not the issue.
The real question is about what the government should be doing to underpin and refresh the China’s growth and employment model without impairing stability. The Party thinks this is about industrial policy and the benign influence of the Party and state, while several intellectuals and China watchers think its about entrepreneurship, private sector dynamism and market mechanisms, and adapting lessons learned from the rest of the world.
CapX depends on the generosity of its readers. If you value what we do, please consider making a donation.