The International Monetary Fund (IMF) reports that China’s real gross domestic product (GDP) grew by 5.2% in 2023, with a projection of 5.0% growth for 2024. However, this growth is characterized by an imbalance, where supply significantly exceeds domestic demand. Challenges such as weak domestic and foreign business confidence, sluggish productivity growth, and systemic debt could hinder future growth. The economic model focused on government investment and exports is showing diminishing returns, influencing China’s current policies.
The Chinese government is attempting to mitigate debt while boosting growth through investments in innovation, education, digital infrastructure, and emerging technologies. State-led industrial policies are prevalent, which often distort markets by promoting production beyond domestic absorption capacity. This surplus is directed towards foreign markets, underscoring China’s significant share in global manufacturing output, which was around 30% in 2022. Concerns have been raised in the U.S. and the Biden Administration about these policies, particularly in sectors like electric vehicles (EVs), semiconductors, solar energy, and steel.
The upcoming Third Plenum of the Communist Party of China (CPC) Central Committee, scheduled for July 15-18, 2024, will likely address economic policies extending to 2035. Key issues include employment, income growth, housing, education, and healthcare. Possible debates may involve strategies to boost economic growth, address regional and demographic inequalities, cut interest rates, and reform tax-revenue sharing frameworks.
China is cautious about adopting broad stimulus measures to increase domestic consumption, focusing instead on narrow stimulus initiatives and government-led investments in manufacturing. For example, value-added tax export rebates and tax incentives for technology and research are being utilized. Furthermore, substantial investments are being made through the issuance of ultra-long-term special sovereign bonds and local government special purpose bonds, supporting infrastructure and housing projects.
The 14th Five-Year Plan (2021-2025) emphasizes research, education, finance, technology, and digital infrastructure, aiming for $1.4 trillion in investment. It focuses on self-reliance and indigenous innovation while maintaining access to foreign markets, technology, and capital. The plan also underscores self-sufficiency in energy and agriculture and seeks to assert China’s leadership in global trade rules and technical standards.
Despite efforts to boost domestic demand, China’s increased manufacturing investment is leading to deflation and excess capacity. This is particularly evident in sectors like semiconductors and EVs, where production far exceeds domestic consumption, prompting significant exports. The global market impact is profound, as China is projected to account for almost half of the new global capacity in mature semiconductors from 2024-2029. Moreover, an oversupply of EVs is anticipated, potentially leading to a surplus of 20 million units by 2025.
Foreign governments, particularly the U.S. and the European Union (EU), are taking measures to counter China’s industrial policies and export strategies. The U.S. has extended tariffs on Chinese goods and increased tariffs on certain products to address market distortions caused by low-priced exports. The EU has initiated investigations and imposed tariffs on Chinese imports in various sectors. Other countries like Indonesia and Canada are also considering similar actions.
Foreign business confidence in China has waned due to stringent “zero covid” policies, economic softening, and political controls. The American Chamber of Commerce reports a significant lack of confidence among its firms in China’s business environment. In response, China is attempting to boost market confidence by engaging with global business leaders.
China’s currency, the renminbi (RMB), faces downward pressure due to low confidence, a strong U.S. dollar, and a gap between U.S. and Chinese interest rates. The central bank manages the RMB’s value by setting a daily trading band, and state banks support these efforts by selling U.S. dollars. The U.S. Treasury Department continues to monitor China’s currency practices, including its reluctance to publish exchange rate intervention data.
China’s systemic debt, encompassing household, corporate, and government debt, reached 311% of GDP in the third quarter of 2023. Local governments and firms have increasingly relied on loans and bond issuances to spur economic activity, creating significant debt burdens. Efforts to reduce debt and promote “common prosperity” are constrained by economic dynamics such as local government revenue dependency on property sales.
The U.S. Congress is actively debating the role of tariffs and other measures to address China’s industrial policies. Legislative actions have been taken to develop U.S. industries in semiconductors, solar energy, and EVs. Potential congressional actions include further investigations into Chinese industrial subsidies and exploring joint trade actions with global partners.
China’s economic strategies and policies continue to have far-reaching implications for global markets, necessitating careful consideration and response from international stakeholders.