As we wait for updates about China’s new leadership team and reform of the party-state structure, here are some initial observations from Jens Presthus, our lead China Analyst, about this year’s big gathering and the various work reports that have been presented.
6 March 2023
Putting this year's NPC and government work report into context
The 2023 edition of the government work report contrasts previous versions by focusing mainly on past achievements. The absence of forward-looking priorities underscores that it was written by the outgoing premier, Li Keqiang, who will have little influence in setting policy going forward. This means that we should read less into this report compared to previous editions. The new economic team, to be headed by the new premier, Li Qiang, will seek to set its mark after the NPC – starting with the concluding press conference on March 13th.
With the release of the work report out of the way, attention can be turned to the main event of this year’s gathering – namely personnel changes and reform of the party-state structure.
Observations about GDP growth and other key economic targets
Setting a GDP growth target of “around 5%” does reflect concern about the economic outlook in Beijing. The CPC has been quite honest about this. At the same time, it should be seen as a positive development that Beijing did not set a higher target. Setting a “low” target indicates the government will rely on “quality growth” such as consumption, business investment and exports to drive the recovery. Little infrastructure investment will be needed to reach it given the consumption rebound and low base from 2022. It also indicates that the government will not pull back from its effort to reform the overextended real estate sector, which arguably is a good thing despite the near-term economic pain that comes with it.
Nevertheless, it is not unlikely that growth will end up overshooting the government’s “modest” target. In the first rebound year of 2021, economic growth came in at 2.1 ppt above the government’s 6% target. The same dynamic may be replicated this year, with growth around 6% probable. This is especially true if the global slowdown ends up not being as severe as first expected.
The targeted budget deficit is larger for 2023 compared to last year - 3% versus 2.8%. Fiscal transfers from central to local governments will also increase, and the latter will benefit from a larger bond issuance quota. Asset sales by local governments should also accelerate. However, this is not because spending necessarily will significantly increase. Rather, as noted in the ministry of finance’s report on the execution of the draft central and local budgets, “the prospects for fiscal revenue in 2023 remain quite grave.” While discussing local government finances, the work report also stressed the importance of avoiding a “build-up of new debts while working to reduce existing ones.” In other words, the government recognises the need to hold back on spending as revenues will remain weak. Moreover, looking ahead to 2024, which arguably will be tougher given that the zero-covid consumption rebound will be gone, officials will want to save some fiscal firepower.
The job creation target has been increased by almost 10% to 12m from 11m in 2022. This confirms two suspicions. The first is that dealing with unemployment will be a key priority this year. Hundreds of thousands, if not millions of migrant workers lost their jobs last year as construction activity slowed down due to real estate reform and manufacturing activity was disrupted by zero covid. Youth unemployment remains at record levels and China is producing more university graduates than ever before. Not finding jobs for these people could become socially disruptive down the line. It would also increase the fiscal burden for already cash-strapped local governments. The second is that the government wants job creation and not income growth to be the main driver for increased domestic demand. The work report targets income growth to keep pace with GDP growth, which at 7-8% means it will be 1-2 ppt below pre-pandemic levels. While this runs counter to much-discussed rebalancing efforts, it makes sense given how focused local governments have been in their work reports about protecting export competitiveness. Manufacturers, especially state-owned ones, will be hesitant about increasing worker wages.
Indeed, while expanding domestic demand is listed as priority number one for 2023, not much is said about how the government intends to accomplish this in terms of directly supporting households. There is one reference to “boosting income”, but most attention is given to “stabilising spending on big ticket items” and “promoting recovery in consumption of consumer services.” To accomplish the former, we should expect a continuation of subsidies for EV purchases and “smart home appliances”. The latter will likely be done through the issuance of restaurant vouchers, although such measures will be limited to richer provinces that still have extra funds to spend. The NDRC’s plan for economic and social development mainly also highlights efforts to make it easier to consume – for instance through increased supply and expansion of e-commerce channels. As should be clear by now, this is not what Chinese households need. China’s e-commerce landscape is already more developed than anywhere else in the world.
The most interesting announcement on income and domestic demand came from the NDRC report which talks about Zhejiang as a demonstration zone for common prosperity – discussing ways to directly increase income through higher wages and indirectly through social security and transfer payments. The ministry of finances’ budget report also discussed the latter. While this is positive in terms of direction and policy focus, it is worrying that the NDRC is still at the stage of refining the approach for just one province as these changes should be taking place across the country as soon as possible.
Strengthening science, technology, and self-reliance remain key themes
The shifting winds and priorities in Beijing can be seen in the business contingent of this year’s NPC, with platform company executives having been replaced by CEOs and founders of semiconductor, EV and AI companies.
The work report also referred to a new system for mobilising resources, arguing that the government’s role in pooling resources should be better leveraged to facilitate key technological breakthroughs. In other words, and as already indicated at the 2nd plenary session of the new Central Committee last week, the CPC will from now on play a much more important role in resource allocation and strategic decision-making at both the public and private level.
Consequently, while officials have continued to talk about supporting the platform economy and building a world-class digital economy, this is mainly about building a digital economy that helps the CPC reach its strategic goals related to technological leadership in AI, renewable energy, smart manufacturing, 5G and so on. Indeed, despite much hype about a “Xi pivot” and an end to the so-called “tech crackdown”, only last week government officials said they would look to tighten regulation of the short-video industry.
In terms of spending priorities, the work report said the government will seek to “…consolidate our leading position in industries where we excel, such as NEVs, 5G, and photovoltaics, make forward-looking plans for future industries, and develop the bioeconomy, the hydrogen power industry, and BeiDou Navigation Satellite System industries. We will accelerate R&D and the application of cutting-edge technologies such as AI, biomanufacturing, green and low-carbon technologies, and quantum computing. We will promote smart manufacturing.” Consequently, while spending on transportation infrastructure likely will decline, we should expect significant spending on the digital infrastructure needed to deploy the technologies of tomorrow.
Separately, the work report said the government should “…redouble efforts to explore and develop important energy and mineral resources, discover more reserves, and boost production.” This points to continued concern about access to key commodities and likely means that the BRI’s recent focus on using both SOEs and private enterprises to secure rights to minerals exploration and production abroad will continue.
Real estate reform continues, but military spending remains flat
The work report stressed the importance of curbing unregulated expansion in the property market. This indicates that Beijing has no plans to backtrack on its effort to reform the sector – meaning the size of the sector will continue to shrink, home prices will fall and a growing number of developers will go out of business. It also means that demand is unlikely to pick up anytime soon, as speculators – who are an important driver for demand – will remain cautious about re-entering the market as long as the government is set on reform.
Contrary to what has been suggested by some media reports, military spending will not increase in 2023. While the spending figure in nominal terms is rising by more than it did last year, it is continuing to increase in line with nominal economic growth – the same as in 2022.
What is increasing, however, is spending on diplomacy. While the size of the spending package might be small in absolute terms, an increase of 12.4% compared to 2.4% in 2022 is notable. This indicates that Beijing will seek to accelerate its “alternative world order” marketing efforts – sharing modernisation best practices with the global south and promoting its Global Security Initiative.
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