A sober message from China’s National People’s Congress

It was Premier Li Keqiang’s big moment, especially given his rather diminished role in Xi Jinping’s China. The Work Report is the premier’s responsibility to deliver, and when he addressed roughly 3,000 delegates at the National People’s Congress (NPC) earlier this week, he warned them “we must be fully prepared for a tough struggle,” and “the difficulties we face must not be underestimated.” This was an unusually downbeat message to share with Party cadres. As we know, the US-China trade dispute is an important part of a more hostile global environment for China; it is by no means the only—or even main—problem.

Li was talking at the start of the first of two weeks of meetings, called the “Two Sessions,” held annually in Beijing’s Great Hall of the People, flanking the western side of Tiananmen Square. The meetings are for the Chinese People’s Political Consultative Conference, and the National People’s Congress. The former is the body that advises the government on a broad range of policy matters, while the latter is China’s parliament, for which delegates convene to debate, possibly amend, but usually rubber-stamp already widely circulated and debated policies for the coming year.

This time last year, the NPC was the forum from which President Xi Jinping emerged with presidential term limits abandoned, followed by claims that he was “unassailable,” “omnipotent’ and so on. Li’s tenor, however, reflects the fact that it has been a difficult year. Xi has faced disquiet at home over his domestic policies and approach to the US. The economy has slowed down significantly, so that at every policy meeting since last summer, unemployment and jobs have been top of the list of priorities. In a country with poor unemployment and labour market data, this emphasis has been quite revealing.

The Work Report details accomplishments over the past year, and sets out tasks ahead. This year, there are 64 in all. Some are specific policy measures, most are bland declarations or slogans. Overall though, the government is concerned about slower growth at home, but also says that it needs to pay attention to durable financial stability, as well as environmental issues, poverty reduction, and industrial and technological transformation.

The government remains committed to a growth target, set at 6-6.5 per cent this year following last year’s target of “about 6.5 per cent,” and outturn of 6.6 per cent, according to official statistics. However, these elevated growth objectives are not compatible with the generally restrictive monetary and credit policies to which it is also apparently committed. This conflicted position and the repercussions of the trade war with the US cast something of a shadow over the realisation of other economic and social objectives.

For the time being though, the government is nevertheless planning to stimulate the economy via budgetary policies. The official budget deficit is predicted to rise slightly to 2.8 per cent of GDP this year, with about RMB2 trillion ($300bn) of tax cuts (mainly lower VAT for manufacturers) and lower industrial electricity, internet and mobile communications charges compensated to a degree by reductions in non-infrastructure public spending. Private firms will also be given some relief on their payments into pension and social funds. These fiscal numbers are opaque, however, and no one should assume that China is trying to observe the Maastricht fiscal straitjacket. Taking into account so-called off-budget special funds(kept separate from the usual budget process) and a 60 per cent rise in bond issuance by local governments to finance infrastructure, the broader budget deficit is likely to be nearer 5 per cent of GDP.

With a beady eye on the trade negotiations and what US negotiators are after—or at least were after—Li was expected to say something about economic reforms, and in particular about the new fast-tracked foreign investment law, due to be voted on next week. But we didn’t learn anything new. The draft law is long on pronouncements and short on details. It purports to bar local governments from requiring foreign companies to transfer technology to partners in China, but says nothing about central government, or other compliance and monitoring regulations that have a comparable effect. Nor does it offer proper assurances about intellectual property infringement or theft of relevance to tech firms in particular, or satisfy long-standing requests from foreign firms about equal fiscal and regulatory treatment.

We should not be surprised. Even though there may be some incremental changes in regulations, and the contentious “Made in China 2025” industrial strategy wasn’t even mentioned by name at the NPC, there is no possibility that China will put its industrial and technology plan on the table for meaningful negotiation. Chinese companies and state entities will continue to find favour and privilege, unlike their foreign competitors.

As far as the Chinese economy goes, the government’s measures are likely to succeed in stabilising the downward drift that’s been going on for many months—certainly in time for the 70th anniversary of the founding of the People’s Republic in October. Yet, those efforts may require more policy stimulus than laid out this week, they probably won’t spark an economic revival as such, and in the bigger scheme of things, they are not so relevant. No one doubts that the state can throw money at the economy in ways that most western economies find difficult nowadays. But that’s not the issue.

The real question is about what the government should be doing to underpin and refresh the China’s growth and employment model without impairing stability. The Party thinks this is about industrial policy and the benign influence of the Party and state, while lots of intellectuals and China watchers think it’s about entrepreneurship, private sector dynamism and market mechanisms, and adapting lessons learned from the rest of the world.