The final version was published by the Financial Times (see here).
At the start of 2024, 14 provinces in China, such as Shanghai, Guangdong, Fujian, and Jiangsu, launched a series of “substantial” projects, indicating a sustained, though evolving, investment-driven economic strategy. Despite the calls from many economists and academics, including myself, for a shift towards a consumption-driven growth model over the past 13 years, the local governments' vigorous promotion of investment projects suggests that policymakers and implementers continue to rely on investment to support economic growth.
The strategy of leveraging investment to drive the economy under the current circumstances is somewhat rational. Internally, a pervasive lack of confidence among Chinese residents has stifled consumer spending, with Peking University's recent survey indicating a modest 4.1% increase in consumer confidence over the past 6 months. Externally, geopolitical competition, the U.S.-China trade war, and a potential recession in the Euro Zone have all presented challenges to China's foreign trade, especially exports, despite Chinese policymakers' attempts to improve the external predicament through the Belt and Road Initiative. In the eyes of Beijing's top leadership, maintaining growth is of utmost importance both economically and politically. Thus, the most viable means to keep the GDP growth rate in the 4-5% range in 2024 is to (vigorously) promote investment.
This time, in contrast to previous investment initiatives, the local governments’ promotion of investment shows a notable shift in objectives and targeted sectors. Firstly, the "science flavor" of the 2024 projects, focusing on new-generation information technology, biopharmaceuticals, artificial intelligence, and low-carbon energies, suggests an ambition to ascend the value chain and develop new growth engines. Secondly, there's a specific focus on investing in public welfare sectors. Thirdly, there's a noticeable decrease in real estate investment projects. Lastly, there is an increased emphasis on private investment.
In the realm of public welfare, local investments are primarily targeting affordable housing, education, hospitals, and environmental projects. According to economist Yu Yongding, China still has a significant gap in these areas compared to developed countries. Therefore, bolstering social welfare projects and providing public goods is a highly appropriate measure. Additionally, on the supply side, enhancing investments in public welfare not only boosts resident consumption but also benefits China's economic growth and development.
In the real estate sector, the residential inventory in 2023 reached a peak not seen since 2017, making the reduction in real estate investment projects beneficial.
However, investing in technology projects and increasing private investments are not without challenges. Whether the goals of productive investment and high-quality growth can be achieved requires further policy improvements and institutional reforms.
In theory, investment in high-tech projects has an immediate positive impact on the GDP growth rate in the short term and may enhance total factor productivity in the medium to long term. Amid great power rivalry, it is also advantageous for China to achieve self-reliance on core technologies through promoting its strategic industries. Yet, due to the inherent nature of high-tech projects, they generally have longer cycles, lower input-output ratios, and non-guaranteed returns. Additionally, prolonged investment on a massive scale creates significant overcapacity in sectors like solar, which diminishes productivity improvements.
The strategy of escalating private investment, though generally positive, confronts significant hurdles: where does the investment money for private companies come from? Liquidity is a big problem for many private companies in China, and Chinese banks traditionally are hesitant and unwilling to lend to private enterprises. “Equally satisfying the reasonable financial needs of different property developers”, a policy introduced at a People’s Bank of China conference in December 2023, is more readily articulated than actualized.
Worse yet, many major projects are funded by local government bonds. The anticipated new special bond for 2024 is expected to reach around 4 trillion yuan, with an increased target fiscal deficit rate. However, in the context of reduced tax revenues, declining land concession fees, and already high local debt levels in China, increasing special bond issuance by the local governments to support major project investments is unsustainable.
In 2024, Beijing faces a critical juncture, with the need to intensify its economic interventions and carefully balance its policy strategies. As it seeks to direct the nation's economic trajectory, the central government should strictly control the increase in local government bond quotas and in the meantime share the local pressure. It should provide large-scale available funds, such as adding trillions of special national debts, to support broad-based infrastructure investments as well as investments in high-tech.
However, it is not just about spending more; it is about spending smarter. Former Chinese official Huang Qifan mentioned in 2022, “In recent years, the total area of houses sold in China is 40 billion square meters, of which 30 billion square meters of new commercial houses sold are in the hands of the people, and 6 billion square meters of these are vacant.” The data on vacant properties and the immense scale of built-up real estate underline the urgency for a shift away from traditional property investments towards more productive and future-oriented sectors.
At the institutional level, both central and local governments must consider the whole picture in project approval, financing, supervision, and acceptance, and carry out necessary institutional reforms. If a system that ensures efficient and high-quality infrastructure investment cannot be provided, China will continue seeing unproductive investments.
In the medium and long run, the optimal strategy entails structural reforms aimed at eradicating local protectionism, fostering a fairer market, and ensuring affordability in housing. A fairer market implies creating an environment where medium and small-sized private companies have equal opportunities to secure bank financing and engage in competitive bidding processes within China. This necessitates a robust political will and a holistic vision that not only aims at immediate growth but also sustainable, inclusive development.