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As the annual session of China's parliament approaches next month, the country's leaders are under the greatest pressure in nearly a decade to make bold policy decisions that will secure the economy's long-term growth potential.
At the start of the year, Chinese stocks fell to their lowest level in five years on growth concerns and deflation deepened to levels not seen since the global financial crisis. This led to comparisons with the turmoil of 2015, which forced policymakers to act.
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“The last time China's leadership faced such pressure was in 2015,” said Tommy Wu, a senior China economist at Commerzbank, adding: “2024 is a crucial year for China's economy to stabilize.”
“However, the current situation is much more complicated.”
China overcame the 2015 crisis by devaluing the yuan and tightening its capital account to prevent capital outflows. At the same time, it invested resources in real estate and infrastructure and cut interest rates by more than 100 basis points.
But that policy ammunition is now spent, bent or broken, limiting its ability to repair the sputtering economy and find a way out of a self-reinforcing downward spiral in consumer and investor confidence and economic growth.
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The real estate market has been in free fall since 2021, as there have been a number of defaults by property developers after years of over-indebted bad investments. High levels of local government debt make it difficult to maintain infrastructure spending.
Further monetary easing risks a run on yuan assets due to a yawning interest rate differential with other economies and could increase deflationary pressures as cheap credit flows into China's overcapacity-stricken industrial complex.
As China's rubber-stamp parliament, the National People's Congress (NPC), begins its annual session on March 5, there are no signs of major stimulus or a major reform plan.
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“It is widely underestimated how limited Beijing currently is in terms of options to stimulate the economy through fiscal policy or through faster bank loan growth,” said Logan Wright, partner at Rhodium Group.
“No political bazookas will be presented at the NPC, also because China does not have good opportunities to sustain growth through its traditional channels.”
“Stuck in the Choice”
Fleeing investors have expressed frustration that authorities have not provided a clear roadmap to address structural problems that were laid bare last year when China's economy failed to replicate the explosive recovery seen by other economies in the wake of COVID-19 experienced.
Markets want clear, long-term plans to turn around the real estate sector, restructure municipal debt and move to a more sustainable growth model based less on debt-driven investment surpluses and more on household consumption.
The NPC is not the traditional venue for Chinese leaders to announce significant policy changes, usually reserved for the so-called plenary events that the ruling Communist Party holds between its five-yearly congresses.
Such a plenary was initially expected in the final months of 2023, and while the meeting could still take place in the near future, the fact that it has not yet been scheduled has increased investor concerns about policy inaction.
Prime Minister Li Qiang is expected to submit his annual work report to the NPC and set economic targets for the year, including steady growth for 2024 of about 5% and a fiscal deficit of 3% of gross domestic product.
But analysts say setting a similar target to last year without new measures to redirect resources from infrastructure and manufacturing investments to households risks damaging confidence rather than boosting it.
Fathom Consulting estimates that every additional 10 yuan invested in the Chinese economy today generates 0.2 yuan of output, compared to 2.1 yuan in 2002.
On the demand front, consumer confidence remains at record lows more than a year after COVID lockdowns were lifted in China.
“There is a lack of investor confidence and business confidence. However, the main driver of this is consumer confidence,” said Joe Peissel, economic analyst at Trivium China.
“The most effective way to address this is through reforms that put more money in consumers’ pockets.”
“However, (President) Xi Jinping has previously expressed an aversion to cash transfers or generous social security benefits, so this is unlikely.”
The rebalancing measures that economists and investors are now calling for are steps that Xi hinted at back in 2013 but that China never took, which has resulted in debt growing much faster than the economy.
Some analysts say policymakers appear to have prioritized social stability and national security over the sustainability of growth because of concerns about the disruption that a different development model creates.
This would happen because such measures empower consumers and private businesses at the expense of the state sector.
“A big change now would admit serious long-term errors — that's unlikely,” said Derek Scissors, a specialist on China's economy at the American Enterprise Institute.
“China is stuck by its own choice.”
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