He Jun
China’s Lianghui (literally, “Two Sessions”) for the year 2023, the annual meetings of the legislature and political advisory body, is set to begin this weekend, and this year’s session is notable for several reasons.
Firstly, it will be the first Lianghui since the 20th National Congress. Additionally, it will be the first session of both the National People’s Congress and the National Committee of the Chinese People’s Political Consultative Conference. Finally, it will be the first session since China relaxed its COVID-19 control measures.
When providing strategic advisory services, many of our foreign clients who have been in China for many years ask ANBOUND researchers about potential personnel changes and adjustments to government institutional reform that may arise from this year’s Lianghui. They are also interested in whether China’s economic recovery is progressing smoothly and if issues such as real estate problems and increasing debt could trigger systemic financial risks. Additionally, they want to know if China’s open-door policy will change as geopolitical tensions continue to rise and if the country will restrict foreign investment in more areas.
Indeed, China’s economic and policy changes in a world dealing with multiple shocks such as war, pandemic, and reverse globalization are the concerns of many. Yet, we believe that this year’s Lianghui, or Two sessions, will generally be unpredictable and perhaps even “uneventful” in terms of major policies and personnel changes. This is because the sessions will mainly focus on the turnover of the State Council system and the arrangement of economic matters. The critical issues such as development direction, goals, strategies, main paths, development frameworks, and key timetables were already determined during last year’s 20th Congress. Therefore, this year’s session is an important meeting to implement the strategic arrangements of the 20th National Congress, and its primary role is not to make decisions but to execute and implement them. After completing the change of the State Council, the Two Sessions are likely to set economic development goals for this year.
Despite the general policy has been determined, it does not necessarily mean that this year’s Lianghui will be devoid of problems. The core task of stabilizing the economy presents one of the most significant and pressing challenges for the Two Sessions this year, and this is particularly true when it comes to monetary issues. Monetary resources are crucial for economic recovery, and for easing the pressures of the aging population and social security. They are also a key indicator of the government’s fiscal health, a vital engine for launching major investment projects, and a credit base for expanding government debt. With these issues in mind, we believe that the core issues being discussed in the Two Sessions will be monetary ones.
Yet, China is also currently facing significant challenges concerning the issue of money. In 2022, China’s GDP reached RMB 121 trillion, while the national general public budget revenue amounted to RMB 20.37 trillion. In the same year, the national general public budget expenditure amounted to RMB 26.06 trillion, leaving a shortfall of RMB 6 trillion. Notably, in its three years of struggles against the COVID-19 pandemic, the country is grappling with a considerable economic slowdown, with many businesses facing a hard time or even bankruptcy, at the same time where there is a downturn in consumer spending. On the other hand, rigid expenditures, including those related to COVID-19, further depleted the central treasury and local finances at all levels. Currently, almost all levels of government in the country are grappling with empty coffers, and several civil servants have faced more than one pay cut. During our research, we learned that some local governments are unable to even guarantee the most fundamental “three guarantees”, i.e., access to medical services, safe housing with basic amenities, and basic free education.
There is, in fact, a shortage of funds at both corporate and residential levels in China as well. Even before the pandemic, the Chinese economy was already experiencing a downturn, which has further intensified over the past three years. This has caused many enterprises to struggle, particularly small and medium-sized businesses, which are facing significant developmental challenges. Those that have survived could count themselves as fortunate. High-debt real estate enterprises are under structural control, and the lack of funding is an obvious issue while manufacturing businesses are generally encountering a dearth of orders and demand. It is worth noting that due to poor expectations, many companies have opted for not lending, investing, or expanding (collectively and colloquially known as the “Three Nos” in China), which has rendered government tax relief and mass financing from banks less effective. This has limited the impact of the central government’s stimulus policies.
At the residential level, increased unemployment risks, reduced income, and fewer job opportunities have resulted in a drop in consumption. Many ordinary Chinese have been restricted to basic “survival consumption” rather than “development consumption” in recent years. The changes in economic behavior at the corporate and residential levels are directly linked to the lack of funds.
Researchers at ANBOUND believe that China faces a significant challenge in stabilizing its economy this year, with the primary difficulty lies in the “three shortages”, i.e., of funds, confidence, and space.
On the issue of the shortage of money, as Lianghui approaches, the most critical problem for the new government team is the shortage of funds for not only the government and enterprises but also for the residents. On top of that, there is an emerging aging population, which will exacerbate China’s financial constraints. It is understood that in most countries, the total pre-funded pensions are about 50% to 100% of GDP, with some countries exceeding 100%. In contrast, this ratio is much lower in China, estimated to be about 10% or less, with some sources suggesting only 6%, while others believe it is even lower, around 2% to 3%. This implies that the country’s pension security capacity is extremely fragile. Consequently, former central bank governor Zhou Xiaochuan recently cautioned that when it comes to pension security, the problem should not be avoided nor delayed in finding proper solutions to it.
The second “shortage”, i.e., of confidence, is a rather common one, with private and foreign enterprises generally adopting a wait-and-see approach. It is commonplace that there are doubts about China’s policies and market growth, and now such doubts are increasing. For instance, foreign investors who approached ANBOUND raised several questions about whether policies will change, indicating their rising concerns. The overall confidence of China’s domestic private enterprises in the situation is also generally low, and ANBOUND’s surveys since last year did not find any private enterprises with high confidence. It is worth noting that the lack of confidence in enterprises is now pervasive, encompassing various aspects such as the policy environment, market environment, supply chain adjustment, foreign trade environment, and international geopolitical friction. These are mostly the result of systemic factors. Therefore, reversing the confidence problem will be anything but easy, and it requires a considerable amount of time.
The shortage of space mainly refers to two aspects: market space and policy space. Market space is influenced by cyclical changes in the economy, industry, and market, and its shortage cannot be solved merely through government policies. On the other hand, policy space is highly relevant to current and future policies as it is also related to the government’s attitude and actions toward the market. Some senior market participants and researchers feel that under the current complex situation, China has less space for development, reform, and fault tolerance. The lack of space is due to policy changes and shifts in the situation. In the past, when China’s economic growth rate was high, the problems were not too critical as there was room to maneuver. However, now the situation is different as structural problems are looming, both long-term and short-term problems are arising.
Overall, the challenges that the Chinese government faces will be reflected in the upcoming Lianghui. Looking ahead, it will be very difficult to solve the “three shortages” mentioned above in the short term, among which the issue of money is the core and closely related to economic development. After the Spring Festival this year, the country is holding a high-quality development conference to speed up development and stabilize the economy with major plans. The main strategy in this is building infrastructures and focusing on big projects. The difference is that the focus will be more on the development of technology industries. However, the question of where the money comes from will still be a key matter in China’s development this year.
Final analysis conclusion:
Stabilizing the economy is the foremost political priority for China this year, and money stands as the core and pivotal issue. The most significant challenge for this year’s Lianghui, or Two Sessions, lies in tackling this matter.
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