China Watch: Economic Policy Prioritizes Innovation, Domestic Demand, Stability

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Summary: PRC leaders plan to address China’s economic slump and structural shortcomings through technological innovation, limited stimulus to spur consumer spending, and tighter controls to prevent a financial crisis resulting from high local government debt and a struggling real estate sector.  Beijing has thus far refrained from a bold stimulus package, suggesting an uneven economic recovery trajectory in 2024.  Nevertheless, the PRC leadership’s focus on growth in strategic sectors and consumer demand presents opportunities for foreign businesses and investors.

On 11-12 December, China held the annual Central Economic Work Conference (CEWC)—chaired by PRC leader Xi Jinping and attended by senior leaders—to set the policy direction for 2024.  The meeting acknowledged current challenges, including weak consumer spending, oversupply in certain industries, financial risks, regulatory shortcomings, and geopolitical uncertainties.  To address these problems, PRC leaders identified technological innovation and domestic demand as the top two priorities for 2024, along with private sector development, foreign trade and investment, debt management, renewable energy, regulatory reforms to address provincial favoritism, poverty alleviation, and social welfare.  

• PRC officials stressed the need for China to move up the industrial value chain by focusing on technological innovations in strategic sectors such as advanced manufacturing, digital economy, artificial intelligence (AI), quantum information science, biotechnology, aerospace, commercial drones, and green technology.  Official Chinese media reports refer to this strategy as “high quality development,” as opposed to the traditional economic model with a heavy reliance on cheap labor and real estate development.
• The emphasis on innovation dovetails with the PRC government’s goal of achieving technological self-sufficiency to overcome Western restrictions on semiconductors, AI, and other advanced technologies.  Xi has repeatedly referred to these core technologies as “chokehold technologies,” without which China cannot move up the industrial value chain.  
• Although PRC leaders pledged additional fiscal and monetary support to stimulate the economy, the emphasis on reducing financial risks suggests that Beijing is likely to refrain from a bold stimulus package.  On 5 December, credit rating agency Moody’s downgraded the outlook on China’s government credit ratings from “stable” to “negative,” citing risks from high local government debt, troubles in the property sector, and weak economic performance.
• Weak domestic consumer demand is leading to deflationary pressures.  China’s Consumer Price Index dropped 0.5 percent in November 2023, marking the steepest year-on-year decline in three years.  Since December last year, Beijing has implemented a series of supply-side policies to encourage spending on electronics, household goods, housing, cars, and travel, but these measures have had a limited impact amid slow economic growth, stagnant wages, and high youth unemployment.  

Beijing’s reluctance to take bold stimulus measures suggests that it is prepared to “muddle through” in 2024 in order to address structural issues such as high indebtedness and overreliance on the real estate sector.  Beijing will rely on tight censorship and the security services to downplay economic problems and suppress dissent.  Tighter control over economic information will present challenges to foreign businesses in obtaining accurate information to make business decisions.

• The CEWC called on officials to “strengthen economic propaganda to guide public opinion,” and PRC authorities are imposing a level of control over economic news that was previously seen only for political news, according to Western press reports.  The government stopped publishing youth unemployment data in August after official figures showed that it had reached 21.3 percent in June 2023. 
• Beijing is likely confident that the security services can prevent sporadic protests from coalescing into a larger anti-government movement, allowing PRC leaders some leeway to take austerity measures to address debt problems facing local governments and the real estate sector.  Collapse of a major property developer such as Evergrande is likely to lead to protests by creditors and homeowners, and Beijing will quickly arrest protestors and use surveillance technologies to identify and stop future demonstrators.      

Most China observers agree that the era of rapid economic growth is over, and future annual growth is likely to be around or under five percent.  Nevertheless, the size of China’s consumer market and the government’s focus on developing certain strategic sectors present opportunities for foreign businesses and investors.

• A November report on Chinese consumers by consulting firm McKinsey and Company estimated that the retail market in China would grow by five percent annually in the next five years, which would make China the single largest growth market globally.  McDonalds and Starbucks recently increased their stakes in China, demonstrating confidence in the potential of the China market.
• Industries such as construction and traditional manufacturing have suffered, but sectors favored by Beijing—such as renewable energy, electric vehicles, healthcare, biotechnology, information technology, industrial materials, and travel and entertainment—are poised for growth. 

US investors and businesses continued to make major investments in China in 2023 despite rising geopolitical tensions.  Ford is establishing a new electric vehicle joint venture with Chang’an Automobile, and Moderna signed an MOU with the Shanghai government in July to research, develop, and manufacture mRNA medicines in China.  Exxon Mobil is moving forward with a new multi-billion-dollar chemical complex in Guangdong province.