Chinese Premier Li Keqiang outlined the government’s roadmap for a post-COVID economic recovery in his annual policy address before the National People’s Congress on Friday. There are three highlights from Li’s speech, which inform of future policy.
The first is to drop the explicit GDP growth target, while setting clear targets for poverty alleviation and employment. Second is a fiscal stimulus of 4% of GDP, accompanied by cutting unnecessary government expenditure. The third is to chart an economic recovery through investment, focussing on “2 New and 1 Major” (IT + UrbaniSation + Major Projects). In a nutshell, China’s plan is to spend its way out of a recession, focussing the stimulus on solvency in addition to liquidity, and being very targeted with investments that both create jobs and assets that are high priority for the country.
Targeting Six Guarantees
China’s economic performance is typically heavily planned, with the government setting hard targets in terms of growth and employment. These targets are a critical component of China’s political economy, in that they are essential parameters in assessing the performance of cadre and bureaucrats. This year, given the COVID-19 pandemic, lockdowns, and the disruption of the economies of its major export markets, China for the first time has not issued a target for GDP growth. State media was quick to hail the move as “wise and farsighted,” given the uncertainties that lie ahead.
While on the surface this might appear to be a sudden reaction to the pandemic, the fact is that rumours of this change have been doing the rounds since the 19th Party Congress in 2017. It was then that Xi Jinping had sought to reorient China’s economic priorities from high growth to high-quality growth, omitting the mention of a GDP target. Therefore, one need not overstate the disruptions that this will cause and should rather expect this approach of not announcing GDP targets to continue in the future too.
But no GDP target doesn’t mean no targets at all. In his speech, Li still issued guidance for unemployment, to be kept at 6%, and set a target of 9 million new jobs for the year. He also held strong to its target of complete poverty alleviation by the end of the year. This clearly shows us China’s priorities, as underscored by the six guarantees that the Politburo had outlined in late April, which included employment, basic livelihood and food and energy security.
Second, with countries around the world announcing large stimulus packages, there’s been much debate about Beijing’s stingy approach to spending over the past few months. Li seemed to put that conversation to a rest in his speech. The Chinese premier announced a stimulus worth around 4% of GDP, or around $560 billion, although he didn’t quite package it that way.
The package includes a reduction in taxes and fees worth $350 billion with measures like reducing and cancelling VAT tax (GST equivalent) for certain categories and firms. He also announced a special $55 billion anti-COVID treasury bond, which will be spent among other things funding medical equipment and technology used for fighting the virus. Lastly local governments will be allowed an additional $55 billion for targeted investments. All this money raised will be an additional cost to the government. At the same time, China has also announced that it will slash 50% of its unessential expenditure as well as a slowdown in increase of military expenditure from 7.5% last year to 6.6% this year.
The hope is that this will enhance the solvency of banks and firms, particularly MSMEs, which are critical to employment, which in turn is fundamental to political stability.
“2 New and 1 Major”
In contrast to its previous stimulus, which followed the 2008 financial crisis and was focussed on broad based infrastructure, this package is more specifically targeted. The three priorities include IT investment in futuristic technologies that are strategically important in China’s rivalry with the US, like 5G, new energy vehicles and charging stations. The second is new urbanisation, including enhancing the public services of counties and renewal of old residential complexes (39,000 for 2020), as opposed to building new ones. Third, is a focus on major projects in transportation and water conservancy including the national railway network.
These are important given that in a bid to boost growth after the 2008 financial crisis, local governments ended up ramping up spending, much of which was either outright wasteful or yielded very low productivity–recall the stories of ghost towns and reports about excess capacities of steel and coal. So Li’s effort is to prevent a repeat of that approach. But this is going to be challenging. While they might not face the pressure of a GDP target, employment pressures could force local governments to revert to the more traditional sectors. This could open fault lines with the central leadership, given Li’s warning that “government funds are public in nature and that no such funds are allowed to be withheld or diverted for non designated uses.”
A big part of the Chinese government’s legitimacy, in the absence of competitive democratic elections, has always been its economic performance. And 2020 was supposed to be a big year for the Communist Party from this perspective. This was the year that the Party would eliminate poverty and achieve the objective of building a moderately prosperous society in all respects. Those political objectives still survive, and they were echoed by Li. But the immediate goal appears to be to ensure solvency, address livelihood issues, maintain employment and invest in strategically significant sectors.
Opinions in this piece belong to the authors: Manoj Kewalramani and Akshay Shah
Manoj Kewalramani is a Research Fellow-China Studies at the Takshashila Institution. Akshay Shah is a Schwarzman scholar from Tsinghua University, and graduate of Columbia University.