China's ambitious targets

Growth and inflation likely to undershoot

At the annual National People’s Congress in China, its leaders announce macroeconomic targets for the coming year. The days when the entire Chinese economy could be managed to meet those targets are likely long gone, however. This is why the announcement of the target of 5 per cent growth in gross domestic product (GDP), as well as a 3 per cent target for inflation in the ongoing year, has been met with general disbelief. Nominal growth of 8 per cent appears particularly hard to achieve when the economy expanded by a mere 4.6 per cent last year in nominal terms. Entrenched deflationary pressures meant that real GDP growth in 2023 was 5.2 per cent; but matching that appears impossible in 2024. The 2023 number was flattered by the country’s unexpected and complete exit from its “Covid Zero” policy, which had long suppressed output. Without that favourable base effect, the consensus is that growth will in fact be 4.5-4.6 per cent. The 3 per cent target for inflation is particularly puzzling, given that even government statistics are clear that the economy is sliding ever close to a deflation trap.

Premier Li Qiang, whose job description includes the management of the Chinese economy, made the announcement in his first work report to the National People’s Congress last week. But he stopped short of providing a clear road map to achieve these targets, saying only that they would need broad policy support and joint efforts across the government. Investors were naturally concerned by this omission. What made it worse was that, for the first time in about three decades, the premier did not take questions from the press following his work report. One basic question might be where the “policy support” would come from. The fiscal deficit target has been set at 3 per cent for 2024, the same as 2023. But matching last year’s growth would clearly need more spending. Either the fiscal deficit must increase and productivity must suddenly spike, or the growth target will be missed. The last seems most likely.

Part of the reason for the pessimism about government spending is that it seems unclear to most analysts how the spending could be deployed. The past approach, of using central government finances to support a vast infrastructure build-out alongside provincial government debt, can no longer be applied. Neoclassical economists would argue that this is the point to loosen the state’s iron grip over capital allocation and the private sector, allowing the former to deploy Chinese people’s savings more effectively. Certainly, previous administrations in Beijing might have given that a try. But the current head of the Chinese Communist Party, Xi Jinping, is not like his predecessors: He clearly sees such actions as a dilution of party control. Thus, there is little hope that productive forces in the private sector will be unleashed. Instead, the hope might be that directed industrial policy will enable growth energy to return. But the only product of such industrial policy in the recent past has been the development of overcapacity in sectors from automobiles to solar panels. This itself has been signalled as a problem at this Congress. China is thus at an impasse. Beijing’s GDP numbers have long been questioned; now its targets will be as well.