The bridged version of this article was published here: https://www.scmp.com/comment/opinion/world/article/3254345/focus-industrial-policy-holds-great-promise-and-risk-chinas-economy
Two pivotal statements
On March 5, Li Qiang, the incumbent Premier of the State Council of China, delineated the country's principal anticipatory targets for economic development within the government's work report. These ambitions encompass achieving an approximate 5% expansion in Gross Domestic Product (GDP); the creation of over 12 million new urban employment opportunities, with an urban surveyed unemployment rate around 5.5%; a consumer price increment close to 3%; synchronicity between residents' income growth and economic advancement; preservation of a fundamentally balanced international payment ledger; an agricultural yield surpassing 1.3 trillion jin; a reduction in the energy consumption per unit of GDP by roughly 2.5%, and a sustained enhancement in ecological environmental standards.
These explicitly articulated objectives underscore the Chinese administration's dedication to maintaining robust economic growth, emphasizing stable employment, price stabilization, improvement of public welfare, and the vigorous cultivation of the low-carbon sector as critical undertakings for China's economic landscape in 2024, which are not unfamiliar to China-focused economists and analysts.
Nonetheless, two particular statements deserve special attention to their strategic implications: the "Synchronization of residents' income growth with economic progression" (“居民收入增长和经济增长同步”) and the pursuit of “a basically balanced balance of payments (BoP)" (“国际收支保持基本平衡”).
The claim that nominal per capita disposable income expands in tandem with GDP growth year-on-year, presuming a stabilization of consumption expenditure as a fraction of disposable income around 66-67% (akin to the previous year yet elevated from 2020-2022), insinuates a commensurate enlargement of the overall consumption expenditure within the economy to GDP growth. This infers that consumption as a share of GDP will (likely) remain unchanged in 2024.
The balanced BoP means that a country's total amount of payments made to other countries is roughly equal to the total amount of payments received from other countries over a specific period. The balance of international payments includes all financial transactions between a country's residents and the rest of the world, including trade in goods and services (exports and imports), financial capital flows, and transfers like foreign aid.
A balanced international payments scenario implies several nuances:
· The export-import discrepancy: the current account surplus will be close to zero. The overall trade balance (exports minus imports) will likely show a shrinking surplus.
· The relation between GDP growth and exports: China can still witness large (net) exports in certain industries, but this would be counterbalanced by imports and other components of the balance of payments, like financial flows and income transfers.
Considering these goals – the alignment of residents' income growth with economic expansion and a basically balanced BoP – investment will play a very critical role in achieving the anticipated 5% GDP growth for 2024.
The rationale for investment as a primary catalyst?
China’s investment-centric strategy, though with flaws, appears somewhat rational given the current circumstances.
Internally, a pervasive lack of confidence among Chinese residents has stifled consumer spending.
Externally, geopolitical frictions, inclusive of the U.S.-China trade war and heightened trade regulatory actions in developed economies, have posed considerable impediments to Beijing's external commerce.
For the country's top leadership, maintaining growth is always of the utmost importance both economically and politically. They perceive invigorating investment as the most feasible approach to achieve a targeted GDP growth rate of approximately 5% in 2024.
What varieties of investment and by what means?
Investment, as widely recognized, manifests in multifarious forms, including private sector initiatives, public projects, infrastructure, and technology. In 2024, China will have infrastructure and real estate investments, but it has started prioritizing strategic investments in high-tech sectors.
The Chinese government is poised to implement aggressive industrial policies to spur domestic investment, particularly in strategic high-tech domains. Scholars typically conceive industrial policy as a governmental intervention in market dynamics to enhance the competitive edge of preferred corporations or sectors. These interventions span tax policies, subsidies, and market entry restrictions. China’s industrial policy is broader. In my publications within the academic journal Global Policy and the Centre for Economic Policy Research (CEPR) in London, I described Chinese industrial policy as encompassing a wide spectrum of government strategies aimed at fostering the growth of national industries. This includes initiatives to stimulate research innovation, scientific breakthroughs, and their commercialization, suggesting that industrial policy transcends mere scientific inquiry to also involve the industrialization and commercialization of research outcomes.
China's monetary and fiscal policies are expected to extend robust support to sectors such as artificial intelligence, electric vehicles, supercomputing/quantum computing, and telecommunications (e.g., 5G and 6G), as well as clean energy. Such industrial strategies are anticipated to facilitate continuous industrial upgrading within high-tech and low-carbon domains, thereby rendering the economy and society increasingly "smart" and "green". Concurrently, these policies are likely to precipitate shifts in the labor force composition, with a gradual reallocation of labor towards secondary and particularly tertiary sectors.
Nevertheless, it is imperative to critically appraise the industrial policy's dualistic nature. On one hand, it can significantly amplify economic disparities between communities possessing high-tech capacities and those without, thereby exacerbating wealth inequalities. On the other hand, due to institutional deficiencies, industrial policies might lead to overinvestment and surplus production capacities in certain sectors. When domestic consumption fails to absorb this excess, it necessitates exportation to balance out.
Implications for International Trade?
The implications for international trade are profound. Leading Economist Barry Eichengreen highlighted in 2015 that projects like the AIIB and Silk Road offer alternatives to domestic investment inefficiencies.
Indeed, when government industrial policies lead to overcapacity (as observed with solar panels and EVs), exporting subsidized products can mitigate the repercussions of unproductive domestic investments. However, this may inadvertently result in foreign producers bearing the costs of subsidies granted to Chinese manufacturers, as eminent expert Michael Pettis elucidates.
Particularly under the current global geopolitical rivalry backdrop, leveraging industrial policies to accelerate industrial development might ignite intensified competition in strategic technological arenas with other countries. Foreign governments might respond by bolstering market access barriers and increasing restrictions on foreign direct investments, thereby escalating trade frictions and potentially sparking more trade wars, which could introduce uncertainties into global supply chains and trade relations.
Reflecting on post-World War II Japan, the Japanese government's adoption of extensive industrial policies to shield domestic industries, such as automotive, electronics, and semiconductors, elicited profound concerns from the United States. The U.S. viewed these policies as distorting international market competition, and coupled with domestic political dynamics, trade disputes ensued.
How might Chinese policymakers refine their industrial policy approach to mitigate its adverse effects?
Effective governance and institutional reforms are essential for policymakers to manage the formulation and implementation of domestic industrial policies.
Specifically, policymakers can enhance their industrial policy governance through several measures, including establishing comprehensive data collection and analysis systems to provide clarity on industry development status, market trends, and policy impacts. This would assist in policy direction adjustments, ensuring positive outcomes.
Moreover, instituting detailed industrial policy evaluation mechanisms, such as quantitative assessments to verify if policies achieve their intended objectives and establishing accountability systems to curb overinvestment, is crucial.
Furthermore, crafting explicit regulations to standardize government market interventions, bolstering innovation support through intellectual property protection and technology transfers, and engaging in international cooperation to mitigate potential conflicts in transnational industrial competition are also pivotal strategies for improving industrial policy management.