China: What Li did and didn’t say at the NPC – Asia Times

China: What Li did and didn't say at the NPC - Asia Times

Investors already seem unimpressed by China’s pledge to grow around 5% this year. It’s not because of what Premier Li Qiang said about Asia’s biggest economy but rather what his National People’s Congress report failed to address.

Along with Beijing holding its fire on massive new stimulus, the report lacked new strategies to fix a property crisis exacerbating deflation. Nor did it detail fresh moves to strengthen China’s capital markets to stabilize sliding stocks.

Li’s report did contain many goodies that might normally send mainland stocks skyward. The gross domestic product (GDP) target is certainly ambitious given Japan is in recession, Europe is heading that way and US Federal Reserve rate cuts are off the table for now.

Plans to champion “high-quality development” augur well for increased innovation, research and development, green energy, cutting-edge manufacturing and, ultimately, higher disposable incomes across the nation.

Investors may be cheered by talk of generating 3% consumer price inflation, holding the fiscal deficit to 3%, creating 12 million urban jobs and increasing tech self-sufficiency as Washington tightens the screws. There’s hope, too, that the plan to issue one trillion yuan (US$139 billion) of ultra-long special central government bonds will boost consumption.

The work report that Li unveiled stressed that to be “well prepared for all risks and challenges,” the government is working to ensure that “internal drivers of development are being built up.”

As such, it said “we will implement a package of measures to defuse risks caused by existing debts and guard against risks arising from new debts.”

Beijing, it added, “will take prudent steps to defuse risks in small and medium financial institutions in some localities and take tough measures against illegal financial activities.”

Overall, Li “provided a largely positive review of the development” efforts, says Bert Hofman, a senior fellow at the National University of Singapore.

But little of note has been said so far about repairing the biggest cracks undermining the economy — and global investors’ confidence in it. These include a property crisis putting China in global headlines for all the wrong reasons and a $9 trillion mountain of local government financing vehicle (LGFVs) debt.

To economist Alicia Garcia-Herero at Natixis, the big takeaway is that the NPC “work report confirms the same growth target as last year, but without a plan.”

Of course, many investors would add to the list the steady reduction in transparency on President Xi Jinping’s watch. Though Li claimed Beijing will “vigorously promote” openness to information, Xi’s moves to tighten control over data, particularly among foreigners, aren’t helping.

Nor is China’s surprising decision to scrap the premier’s traditional press conference at the close of the NPC. It’s the first time that’s happened since 1993.

“China seems to be heading towards close-door policies with more opaqueness on economic policies,” says analyst Kelvin Wong, who publishes the Lighthouse Chronicle newsletter.

As such, he detects a “lack of any clear catalyst to kickstart a major bullish impulsive trend structure for China and Hong Kong benchmark stock indices.”

Without increased visibility on Beijing’s policy, Wong says, “China stock market and capital markets are likely to be shunned by international players,” except for those within the Belt and Road circle of nations.

Ruihan Huang, senior researcher at the Paulson Institute think tank, argues the NPC’s work report contained “good news for foreign investment.”

“Beijing will fully abolish restrictive measures on foreign investment access in the manufacturing sector and liberalize market access in services such as telecommunications and medical care.”

On the other hand, Huang adds, it’s noteworthy that amidst the persistently sluggish real estate market, Li omitted the phrase “houses are for living, not for speculation” this year. In 2023, then-premier Li Keqiang featured that phrase prominently.

China’s ambition, expressed by China’s 5% growth target, might indeed raise concerns that Team Xi might resort to putting short-term growth ahead of long-term reforms to avoid future boom-bust cycles.

Chinese Premier Li Qiang and President Xi Jinping in March 2023. Photo: Xinhua

Lynn Song, greater China chief economist at ING Bank, notes that with “pervasively downbeat sentiment and property market weakness remaining an overhang, reaching 5% growth this year may be more difficult.” As such, her team expects to see “a moderate level of policy support.”

Yet moving China beyond those up-down GDP cycles requires reading the cracks underneath the economy. And with action, not slogans.

It’s grand that Xi and Li favor “higher productivity” and “high quality” growth. It’s another thing to do the heavy lifting to achieve it, China watchers say.

By her reading, Garcia-Herero at Natixis says Tuesday’s proceedings offered “no stimulus — the fiscal deficit even lower — no liberalization, nothing.”

On Tuesday, Li acknowledged that China’s economic performance faces “difficulties” that have “yet to be resolved.” Li even detailed where the cracks lie, saying that “risks and potential dangers in real estate, local government debt, and small and medium financial institutions were acute in some areas. Under these circumstances, we faced considerably more dilemmas in making policy decisions and doing our work.”

One problem, of course, is a lack of trust in China’s economy at a moment when Xi’s party is muddying foreign investors’ ability to discern the true fundamentals of the economy. Already, for example, there are doubts among analysts that China really grew at the 5.2% rate Beijing claims in 2023.

“A lot of economists think the numbers are completely fabricated. The idea of 5.2% or 5.5% growth is [very] likely wrong,” says Andrew Collier, managing director at research firm Orient Capital, told BBC. “It’s more like 1% or 2%.”

Though that may seem overly pessimistic, Collier speaks for many when he says “I think the next five or 10 years is going to be difficult.”

That’s in part due to an intensifying US-China trade war. In Washington, President Joe Biden’s White House continues to limit China Inc’s access to semiconductors and other vital technology – and US investors’ ability to invest in mainland tech firms.

On Tuesday, Beijing reaffirmed its overriding goal of becoming self-reliant in chipmaking and artificial intelligence in order to compete with the West.

The central government is boosting spending on technology and scientific research by 10% to nearly US$52 billion this year. Along with promoting national champions, the plan involves giving key enterprises a pivotal role in driving the policy.

“We will fully leverage the strengths of the new system for mobilizing resources nationwide to raise China’s capacity for innovation across the board,” Li’s report as delivered to lawmakers said.

“We will pool our country’s strategic scientific and technological strength and non-governmental innovation resources to make breakthroughs in core technologies in key fields and step up research on disruptive and frontier technologies.”

Yet underneath these worthy goals is a financial system still misallocating capital, damaging confidence among foreign investors and undermining domestic business and household confidence.

In February alone, the value of new home sales plunged 60% from a year earlier. That followed a more than 34% drop in the previous month.

China’s property market is a growing drag on the economy. Image: Screengrab / CNBC

Because real estate is the main asset in which Chinese invest, plunging property values are undermining consumption at a moment when Xi and Li hope to boost domestic demand.

As such, Beijing must detail plans to accelerate steps to repair the housing sector and to get bad assets off property developers’ balance sheets.

It’s vital, too, that Xi and Li find ways to reassure global asset managers that the roughly $7 trillion stock rout between 2021 and last month won’t continue. Beijing’s deployment of the “national team” of state funds to buy shares won’t renew confidence in the long run. That, analysts say, requires bold policy changes.

That’s why, for now, economists at HSBC think “recent market turmoil may prompt more decisive and quick moves by the national team to help restore confidence and prevent a self-fulfilling cycle.”

Yet decisive and quick moves seemed in short supply Tuesday. The same goes for altering the narrative on deflation.

“Once the expectation for further deflation is formed, consumers and investors will cut back on their spending,” says Gene Ma, head of China research at the Institute of International Economics. “Deflation will reduce the nominal GDP and thus raise the debt/GDP ratio and exacerbate the debt overhang.”

Ma argues that “the falling asset prices and negative wealth effect are hurting investment and consumption. The falling asset value relative to liability may force businesses and households to repay their debts to deleverage, making monetary easing like pushing on a string. Moreover, deflation causes weaker corporate earnings, rising defaults, and deteriorating bank asset quality, which in turn could lead to credit contraction.”

The People’s Bank of China has responded with cuts to required reserve rates and official interest rates. However, Ma says, “the producer price inflation-adjusted real lending rates remained elevated at 6.6% in the fourth quarter. We think a lot more forceful policy measures are needed to prevent deflation from doing more damage. The PBOC should explicitly anchor the inflation expectations by introducing an inflation target of 2% to 3%.”

So far in 2024, the PBOC has been reluctant to ease assertively. One reason is Xi’s determination to keep the yuan from falling. That, Xi’s inner circle apparently worries, would squander progress made in building global trust in the yuan and anger Washington head of a contentious election.

Another is fear of incentivizing bad lending and borrowing behavior. The liquidity bursts that are flowing from the PBOC have been enough to tame bond market dynamics but not stabilize Shanghai stocks.

Part of the rationale seems to be that China can do the bare minimum to stabilize stocks and keep GDP as close to 5% as possible. The restrained nature of policy moves, though, appears positive for bond markets and negative for stocks.

Hence the benchmark’s sharp swings up and down on Tuesday. The Hang Seng China Enterprises Index dipped as much as 2.6%, the most in more than a month.

The good news: Xi and Li still have another week of NPC festivities to lay out a clear and coherent plan to repair a cratering property market and restore trust in the stock market. All global markets can do is hope that they use it.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek