3 Key Takeaways from China's Lianghui

This month’s key event were the plenary sessions of the National People’s Congress (NPC) of China and the Chinese People’s Political Consultative Conference (CPPCC), otherwise known as the ‘Two Sessions’ (or Lianghui). We will soon be releasing a report with our views on the main implications of these meetings. In the meantime, I thought it would be good to use this month’s newsletter to talk about what I believe are the three key takeaways for China’s economic, policy and geopolitical outlook.

First, on the economy, this year’s priority is to stabilize growth. Much has been said about the official target of “around 5 percent” GDP growth for 2023. Some see it as a modest target, referring to China’s growth potential after its zero-COVID exit. Others have called it a prudent target, meant to facilitate the continued pursuit of reforms for China to transition to high-quality growth. But, in my view, the target is realistic – plain and simple.

While the Chinese economy is indeed rebounding – as we explore in our new China Consumption Monthly Roundup – it is facing significant headwinds. Private consumption remains below pre-COVID levels, and the recovery we are seeing is lopsided, with weak spending on big-ticket items. It will take time for confidence to recover given the scarring effect that almost three years of restrictions had on households’ balance sheets, income growth and the job market. This also implies that the ongoing bottoming out of the property sector is not a surefire indication that the downturn is over. Meanwhile, the global growth slowdown is hitting China’s exports. So, while the economy is indeed doing better, risks are tilted to the downside.

To make matters worse, local government finances are in a precarious situation after years of stimulus measures, and lower revenue because of tax reductions and fewer land sales. Pursuing a more ambitious growth target would require boosting stimulus at a time when China’s capacity for this is strained, risking an exacerbation of the structural imbalances that China is trying to address to avoid falling in the middle-income trap. I therefore take the “around 5 percent” growth target as a positive signal, that authorities understand that 2023 will be a difficult year for growth. Which also means that this is not a modest target. And it is not a prudent target either, because the current focus is stabilization, not reform. But insofar as economic stabilization is achieved, the conditions will be set for the continued pursuit of structural reforms.

The second key takeaway pertains to the centralization of power. Not because it happened, which we expected after the 20th National Party Congress last year. But because it reveals a sense of urgency from China’s top leadership to ensure that the headwinds that China is facing domestically and externally do not derail the realization of its development priorities. And if you are wondering what these priorities are, new Premier Li Qiang was very clear in his press conference that the ultimate goal of his government is the realization of ‘Xi Jinping Thought,’ which sets a development blueprint for China throughout 2050.

I already explained briefly the short-term economic headwinds China is facing. Longer term, there are two main challenges. First is boosting the contribution of private consumption to growth. This has proven to be quite difficult, reflecting a series of structural imbalances which will require time to address, such as income and wealth inequality, a thin social security net, and the development divide across the country. China’s ageing demographics further complicate these challenges. The second challenge is raising economic productivity, for which one of the main drivers is technological innovation. And this takes me to the external headwinds China is facing. The US Government is taking increasing actions to cut China’s access to emerging, core technologies, especially those where they have significant external dependencies, such as advanced semiconductors.

Against the backdrop, China faces a new development paradigm which cannot be simply termed as a need to shift from rapid growth to high-quality growth. Rather, it is a paradigm where China’s success in transitioning to a high value-added economy will depend on how resilient its development is to rising global volatility, and how effective it is in ensuring that growth is inclusive and sustainable. This is why, while Xi Jinping and senior Party officials had already been playing a central role in outlining China’s development priorities, they now want to play a central role in effectuating the policies and measures deemed necessary to realize these priorities; and in making sure that the government follows through.

So now the executive organ of the State Council (i.e. China’s cabinet) is being led by an all-new team of top CPC officials loyal to Xi. And the NPC approved a Party and State Institutional Reform Plan to strengthen the “centralized and unified leadership” of the CPC Central Committee over several areas of work of the government, the most important of which relate to China’s financial system and building tech self-reliance.

The third key takeaway is about China’s geopolitical ambitions. One of the highlights of the Two Sessions was the very vocal rebuke to the US Government by Chinese authorities, insofar as Chinese official speech since Deng’s ‘reform and opening up’ has been typically restrained.

These declarations reflect a change in the way China sees its bilateral relationship with the US. While China’s rise had been identified as a strategic challenge by the US Government since even before Trump came to power, Chinese officials could always count on the benefits of bilateral trade and investment to maintain the relationship going. But it is now clear that being “tough on China” is not only a slogan used during campaigns to gain votes, but a firm belief across the political spectrum.

In response to this, the Chinese Government has decided to play a more prominent role in the international stage to protect its interests against US containment strategy, including by building goodwill amongst ‘Global South’ nations and developing its reputation as an effective and pragmatic power. This is the context against which the peace deal that the Chinese Government brokered for Saudi Arabia and Iran to reestablish diplomatic relations must be understood.

Going forward, we can expect China to redouble efforts aimed at strengthening its alliances with Global South nations. And, indeed, the Belt and Road Initiative is regaining some of its lost profile, with authorities having declared at the Two Sessions that China will host its third ‘Belt and Road Forum for International Cooperation’ this year. Notably, Xi invited Russian President Vladimir Putin to attend this Forum during his recent state visit to Russia, signaling that China will pursue its own foreign policy goals, irrespective of what the West thinks.

Well, this is it for this month. Please stay tuned for our report on the implications of the Two Sessions. And let me know if you have any comments and/or questions about my views above. I am always happy to jump on a call or meet to discuss.

Until next month,

Alfredo Montufar-Helu