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Chinese Premier Li Qiang bows after delivering the work report at the opening session of the National People's Congress (NPC) at the Great Hall of the People in Beijing, China March 5, 2024.
The truth behind China’s growth facade
Chinese Premier Li Qiang announced on Tuesday at the annual Two Sessions meeting that Beijing would seek to grow its economy by about 5% in 2024. China will also aim to create 12 million new urban jobs and keep inflation around 3%.
While it seems ambitious, Rick Waters, managing director for China at Eurasia Group, says Beijing will hit 5% – by hook or by crook.
“The bigger question is whether the Chinese economy will transition to sustainable drivers of lower but healthier growth,” he says. China is betting on high-tech industries, from renewable energy to electric vehicles, but these sectors will not easily replace the ailing property sector as a driver of growth or aid in the transition to a consumption-led growth model, even as Xi attempts to tighten control of both politics and the economy.
One side effect is that economic data is now becoming politically sensitive, with Beijing withholding youth unemployment numbers and censoring references to deflation.
Just this week, Beijing scrapped the annual tradition of holding a press conference with the premier at the Two Sessions – not just for 2024, but until 2027. That ends one of the only opportunities journalists had to question China’s head of government about the country’s highest-level budget and policy decisions.
“Canceling your quarterly earnings calls isn’t a formula to improve market perceptions. The reality is that market information on the world's second-biggest economy is worsening,” says Waters.
Chinese President Xi Jinping (L) converses with Premier Li Qiang on the first day of a weeklong meeting of the Chinese People's Political Consultative Conference, China's top political advisory body, at the Great Hall of the People in Beijing on March 4, 2024.
China’s Two Sessions: It’s a Xi show
On Monday, Beijing scrapped a closing press conference for its annual “Two Sessions” meeting of its rubber-stamp parliament, pausing a three-decade long annual tradition for China’s premier (the No. 2 guy). That means the foreign press will lose a rare chance to speak to Premier Li Qiang, one of China’s most powerful people.
But it also robs Li himself of a platform that other Chinese leaders have used to build their own brands. Li’s predecessor, Li Keqiang, earned himself the moniker “the people’s premier” after he railed against pervasive rural poverty during the 2020 Two Sessions presser.
The opacity reflects what Eurasia Group called "Maximum Xi” in its top risks report last year, as President Xi Jinping reacts to increasing challenges by centralizing his power even more.
"Under Maximum Xi, what Li Qiang might have said in the closing presser wouldn't matter anyway,” says Lauren Gloudeman, a China expert at Eurasia Group. “He was only going to say what was approved."
A woman passes by a giant monitor showing the "Two Sessions" in Beijing, China.
Why is China’s economic growth target so meh?
Dissecting an annual GDP growth target is what economics nerds dream of. For the rest of us, it's instant melatonin.
But if that target comes from the world's most populous nation, second-largest economy, and top exporter, perhaps you should pay attention.
At the annual "Two Sessions" meeting of its rubber-stamp parliament over the weekend, China's government set its 2023 economic growth target at "around" 5%, the lowest since 1991. That's (slightly) below market expectations for China, whose GDP for decades expanded by more than 10% annually and before the pandemic was still more than doubling economic growth in the US and Europe.
Why is Xi Jinping doing this? For one thing, he doesn't want to get burned like last year, when the ruling Communist Party for the first time missed its 5.5% annual target by almost half, thanks mainly to zero-COVID.
For another, Xi likely thinks that he needs to play it safe as the economic recovery from zero-COVID is still far off. What’s more, China faces major headwinds from sluggish demand, supply shocks, and weak expectations.
In short: China wants to under-promise and — hopefully — over-deliver.
How did we get here? The pandemic laid bare deep structural problems with China's economy that can no longer be swept under the rug. Arguably, the most important one is soaring debt related to the real estate sector, under intense scrutiny since the Evergrande crisis in late 2021.
But it's not just the property market — rural banks and local governments are also very deep in the red. Any of the three is too big to fail, and Beijing is spending billions to ensure they don’t.
Still, China's GDP growth figures have been trending downward for years — in part because the economy has matured and no longer needs the breakneck expansion of an emerging market. Xi was previously willing to trade slower growth for "common prosperity," which is CCP-speak for curbing inequality.
Beijing thinks it can turn this around by boosting domestic consumption. Yet none of the big-picture policies currently on Xi’s desk would accomplish as much in the short term as taking a page from (!) America’s COVID recovery playbook, says Eurasia Group analyst Lauren Gloudeman.
"The most impactful thing Beijing could do to stimulate consumption this year would be handing out stimulus checks,” she explains, “but China's leaders have shown ideological opposition to this and other forms of welfare as encouraging laziness."
Although the dim global economic outlook doesn't help, this is mostly a domestic story. For instance, while demand for Chinese exports has been sputtering since Western central banks started raising interest rates to tame inflation, net exports actually have a negligible effect (+/-0.2%) on the country’s GDP.
More importantly, less but more sustainable growth is better in the long run for China. The 5% target, Gloudeman explains, "is more realistic and rational as a policy signal compared with a higher target, which would need an excessive stimulus that would probably not be very effective and come at the cost of more sustainable growth in the long term."
The meh figure, she says, "tells us that the focus is not on delivering just the appearance of high growth, but rather on getting the recovery back on track with a focus on addressing risks to the outlook."
FYI, take China's official numbers with a grain of salt. After all, outgoing Premier Li Keqiang admitted to US officials in 2010 that they’re "man-made."
If you want to get a more accurate picture of where the Chinese economy stands, check out other statistics like the breakdown of credit growth, industrial output volumes, or property values. Once you aggregate everything, most likely the “real” figures won't add up to the government’s.
"In reality, the target is mostly just a political signal,” Gloudeman says. And keeping that in mind is “the whole point of analyzing China's economy.”