11 Apr China Outlook: Unpacking China’s Two Sessions 2024
China convened its annual 2024 Two Sessions in early March bringing together the country’s top political advisory bodies, the National People’s Congress, and the Chinese People’s Political Consultative Conference, to discuss the country’s future policy trajectory on both the political and economic fronts.
With China facing an economic slowdown, many analysts and investors looked to the Two Sessions for insights into the country’s policy priorities. Overall, most of the announcements made were largely expected. One surprise was the cancellation of the press conference by Premier Li Qiang. The premier’s conference at the conclusion of the Two Sessions had been in place for some 30 years.
The takeaways from the Two Sessions and possible next moves for China were discussed at a talk organised by the Singapore Institute of International Affairs (SIIA) on 19 March 2024. Mr. Martin Petch, Vice President- Senior Credit Officer, Sovereign Risk Group at Moody’s Ratings, Dr. Lance Gore, Senior Research Fellow at the East Asian Institute of the National University of Singapore, and Dr. Oh Ei Sun, Senior Fellow at SIIA, were the speakers at the talk. Dr. Yeo Lay Hwee, Senior Fellow at SIIA, served as the moderator for the session.
Key Takeaways from the Two Sessions
Dr. Oh Ei Sun and Dr. Lance Gore provided a quick analysis of the major announcements made during the Two Sessions.
Firstly, the cancellation of Premier Li’s press conference was a disappointment to some, hoping to understand the inner workings of the Chinese government through the Premier’s lens. The cancellation seemed to show that the state apparatus is gradually being subsumed under the party’s control.
The Two Sessions signalled the Chinese leadership’s confidence in their way forward. This was reflected in the ambitious economic growth target of 5%. While many analysts have been quick to comment on the difficulty of China achieving such growth figures this year, Dr. Oh pointed out that official figures may not capture all productive activity of the Chinese economy owing to incomplete reporting by businesses. Thus, real growth generated could be closer to the 2024 target.
Next, President Xi’s calls for high-quality development as the next phase of China’s growth featured prominently during the Sessions. Dr. Gore noted that the newly coined term “new productive forces” was first revealed by Xi in September 2023. These new productive forces can be understood as the new economic growth engines behind China’s high-quality economy. Announcements by China’s top brass indicated that this would take place in three key sectors: electric vehicles (EVs), sustainable energy products and Artificial Intelligence (AI) products and services. The shift in focus to such new areas of growth came amidst calls from China’s top policymakers to replace the old engines of growth with new ones, but it remains to be seen how sustainable such a shift would be given the ambitious aims of the government.
Perhaps in anticipation of such questions, the Chinese government also unveiled one trillion yuan (S$187 billion) of ultra-long special central government bonds. These bonds will likely fund the country’s economic development and fiscal needs, and service outstanding debts of local governments or favoured property development companies.
Economic Overview and Analysis
Mr. Petch and Dr. Gore shared their insights on the possible trajectory of the China’s economy.
Overall, Chinese leaders appear to be pushing for the construction of a more interconnected but complex economy. There appears to be three tenets to this push according to Dr. Gore:
- Development of research and development capabilities
Dr. Gore noted that China has implemented changes to its education system aimed at reconnecting university research with industries and development efforts, instituting stricter regulations on intellectual property rights, and encouraging researchers to commercialise their patents.
- Use of big data and AI in the upgrade of whole industries
As China’s economy seeks to move up the value chain, the Chinese government is adopting a three-prong strategy to enable this pivot. While new economic growth engines, such as EVs, solar energy and storage batteries are being expanded, traditional stalwarts of the Chinese economy, such as industrial manufacturing will be revitalised through leveraging on new technologies, such as big data and Artificial Intelligence (AI).
- Economic and institutional reform
Dr. Gore noted that the abovementioned policy moves would require significant economic reforms. To complement this new economic growth model, Dr. Gore also highlighted the importance of market reforms to enable greater demand. These market reforms would include the removal of trade barriers, loosening of restrictions on China’s anti-monopoly law and new policies to attract foreign investment. Such reforms will have to be implemented such that the economy can be more competitive.
The three panellists also shared on what Chinese officials ought to consider while restructuring the Chinese economy. Firstly, policy coordination between local governments and at national level would be of greatest importance. The inconsistent coordination between the two levels could exacerbate China’s economic problems. Next, policies will also need to raise business sentiments and business confidence on the long-term trajectory of the Chinese economy. Lastly, broadening China’s tax base may be useful. The resulting tax revenue could boost regions exposed to faltering industries and help China achieve its ambitious restructuring aims.
However, stimulating international and domestic demand appears to remain out of reach. Geostrategic tensions with the EU and the US have tightened external demand, with China’s exports falling to historic low levels. On the domestic front, few measures have been put in place to stimulate China’s consumption. The Chinese government has refrained from providing demand stimulus, such as cash transfers, unlike its Western peers, as China seeks to steer away from debt-fuelled growth. Instead, pension reforms have seen more success, encouraging Chinese consumers to spend instead of save. Nevertheless, China’s domestic consumption remains weak and recent pick-up in economic activity is likely attributed to government stimulus. With external demand faltering, and weak domestic spending, it remains to be seen whether China’s fiscal measures can turn the tides for the Chinese economy.
On Chinese leadership: well-balanced or a single point of failure?
With power increasingly consolidated under President Xi, there are growing concerns over his ability to single handedly resolve the issues China presently faces. While President Xi initially came to power due to his comprehensive and clear blueprints for China’s future, his popularity took a toll during the pandemic, evidenced by unprecedented protests held during the lockdowns, frustrated by the restrictions imposed on them with no end in sight. The lack of a correction mechanism to ensure checks and balances as well as President Xi’s efforts to surround himself with loyalists through his anti-corruption campaign has created an echo chamber at the top echelons, creating room for future policy mishaps.
However, some panellists believe that Xi’s leadership may yet benefit China, given that Beijing has proven its capability in leading China to attain great economic achievements over the past decade. The more pertinent question may be whether Xi has enough bureaucrats to implement his ambitious plans to restructure the economy and tackle China’s environmental goals. Key uncertainties such as the US presidential elections and the intensifying geopolitical tensions may also threaten the progress made by Chinese officials.
Mr Martin noted that other critiques of Beijing stem from the ideological root of its rule – that private property is regarded as the source of all evils. Hence, private businesses often lack adequate protection over their earnings and therefore feel vulnerable in China’s business environment. A dichotomy has formed between the attraction of the large Chinese market and the undue restrictions placed on businesses operating in the market.
On China’s geopolitical position
The intensification of Sino-American rivalry has also further compounded China’s structural issues. China’s tacit cooperation with the US in the past allowed China to work with US firms to mass produce American inventions for international buyers. However, with growing trade and investment restrictions from the US, China is struggling to encourage home-grown innovation. Technology leaders are also finding it hard to work around America’s export restrictions on critical technologies, like semiconductor chips.
On the other hand, intensifying tensions between both US and China could allow China to cultivate stronger geopolitical ties amongst developing economies. With the US’s focus on conflicts in the Middle East and Europe, developing economies have begun to feel frustrated with the sanctimonious tone and lack of funding from US and the West. In comparison, China’s flexible loans to these countries have made it a more attractive partner, making China a leader in the Global South. This positions China well in some key foreign policy areas. That said, China’s current economic slowdown weighs on its ability to continue such financing efforts in the Global South. China is thus relooking its Belt and Road Initiative to explore new ways to further deepen ties with the Global South, away from Chinese capital-heavy infrastructure projects.