Doubt on China's Plan to Lift Consumption, Maintain Growth

Initial reactions to Premier Li Qiang’s vision to ‘transform’ the Chinese economy – as outlined in his ‘work report’ for the third Xi Jinping-led administration in Beijing on Tuesday – have been cool and sceptical.

Analysts say there are contradictions and omissions that undermine confidence in the government’s capacity to keep growth at around 5% this year.

Li pledged to parliamentarians at the National People’s Congress to expand domestic consumption, while curbing industrial overcapacity, local government debt risks and supporting only “justified” property sector projects.

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These promises, in isolation, would be music to the ears of those who have been calling on China to fix its deep structural imbalances, including its high reliance on debt-fuelled investment and ultra-low household spending.

But municipal debt for infrastructure projects, real estate excesses and manufacturing investment have been among the key pillars of China’s economic rise. Curbing them implies accepting lower growth as well in the short term, analysts say.

“It is a contradiction, coupled with an omission,” said Alicia Garcia Herrero, chief economist for Asia Pacific at Natixis. “They are not explaining how they are going to transform the economy.”

China has been here before: in 2013, President Xi Jinping unveiled a slate of bold economic and social reform plans in a 60-point agenda that painted a long-term picture of free markets and consumption-driven growth.

Since then, however, China had tightened its capital account and market supervision, and doubled down on state-led investment.

Investors and consumers underwhelmed

A muted market reaction to Li’s pledges on Tuesday contrasts with the 2013 rally that followed Xi’s reform agenda. Investors and consumers have become sceptical about implementation, which risks exacerbating a crisis of confidence abroad and at home.

“Household and business sentiment is likely to remain low,” Max Zenglein, chief economist at MERICS, a China studies institute, said of the impact of Li’s report.

“There might be a form of ‘promise fatigue’ within the society which struggles to buy into the path put forwards by the leadership.”

Many of the 2013 plans came against the imperative of stability, which Li also flagged in his report.

In 2015, China went through a capital outflows scare, finding out how mighty and disruptive markets can be.

In 2017, plans for relaxing Mao-era residence rules that block many rural migrants from urban public services and incentivise them to save rather than spend, hit a major setback.

Authorities in larger cities launched campaigns against the influx of “low-end population”, citing social stability.

As the switch to consumption- and market-driven growth fizzled and the threat of a sharp slowdown loomed, China leaned on the property market and infrastructure spending to hit growth targets.

When the real estate bubble popped in 2021, local government revenues from land development plunged, rendering debt levels in many cities unsustainable.

Some of the policy responses from indebted cities highlight the difficulty of shifting growth gears. Cutting civil servant pay, and raising fines on small businesses to boost revenue run contrary to the aim of boosting consumption.

But driving household income growth when revenues are falling requires funds to be taken from other parts of municipal economies, among the wealthiest being the state firms and their contractors.

“Redistributing resources towards households means transferring money away from vested interests,” Joe Peissel, an economic analyst at Trivium China, said.

Boost for farmers’ pensions

To be sure, Chinese officials on Tuesday announced specific plans that go towards boosting consumption.

Officials plan to raise farmers’ pensions by 20 yuan ($2.78) a month to 103 yuan. They also plan to reduce childcare costs and improve elderly care as part of a “proactive national strategy in response to population aging.”

Analysts at Nomura led by Ting Lu gave a thumbs-up to this aspect of the national plan in a note on Wednesday, saying that 160 million elderly Chinese would benefit from this move.

“We believe raising farmers’ pension payments may be the most effective way to boost consumption. [But] achieving the ‘around 5%’ growth target will be very challenging,” they said.

Premier Li also announced a “new model” to develop real estate, focused on government-subsidised housing for people on low-incomes.

Some analysts also expect China to announce subsidies for households to upgrade home appliances – a one-off measure that would bring forward some spending plans.

And China’s state planner flagged efforts to further relax urban registration permits (known as hukou), allowing more migrant workers to access basic public services. However, officials in many top-tier cities may oppose such a move.

Some analysts also point to China’s push for new productive forces to move its manufacturing complex up the value chain as important for household incomes, given the high youth unemployment levels.

And trying to give the economy a near-term boost is not without merit, if it creates more space for structural changes later, some say.

Hwabao Trust economist Nie Wen says advanced industries can help China reach its target of creating 12 million new urban jobs and absorbing a similar number of university students graduating this year into the labour force.

“In the short term, demand is weak, and both households and companies face relatively big deflationary pressures, while high-quality growth and risk control are long-term issues. We need to strike a balance,” Nie said.

Funding high-tech shift, local government debt

That balancing act likely means Chinese debt – now roughly three times its economic output – must go up to finance investment in high-tech industries, and manage the pace of the property downturn and the restructuring of municipal liabilities.

China’s central government debt was 23.8% of GDP, according to International Monetary Fund data. By comparison, local governments and their financing vehicles owed roughly 80%.

In his report, Li Qiang said the central government will issue 1 trillion yuan in special ultra-long bonds this year, in a move analysts saw as signalling Beijing was willing to shoulder a higher share of the burden of meeting growth targets.

Juan Orts, a China economist at Fathom Consulting who predicts the country grinding on a path towards Japan-like stagnation, says that is not a long-term solution, either.

“No matter where the debt is coming from, that is still weighing on the economy,” Orts said.