The first economic report card for the Li Qiang government

Amid the gloom of unfavourable factors, China's economy grew 5.2% in 2023, meeting the official target of around 5%. This shows that the various measures urgently implemented by the central government since the third quarter of 2023 to boost the economy have propped things up somewhat.

This is the first time the country has released its annual GDP growth rate since Li Qiang took office as premier. Although he only took office in March 2023, this can still be considered his first annual report card, and the results achieved are no mean feat, given the current circumstances. However, a closer look at the specific economic indicators shows that the situation is still grim and not looking up.

China's annual fixed-asset investment grew 3.0% in 2023, with investment in infrastructure construction expanding a mere 5.9%, falling short of expectations. Exports grew by just 0.6%, a far cry from the growth of 10.5% in 2022. Measured in US dollar terms, exports fell 4.6% compared to the year before, recording its first full-year decline since 2016.

Consumption was a bright spot in China's economy, with retail sales of consumer goods climbing 7.2% last year. Unfortunately, household consumption accounted for less than 40% of China's GDP, far below the level of developed countries, with insufficient strength to propel the economy. To increase the share of consumption in GDP, issues concerning wage growth, lack of social welfare and the employment situation must first be resolved.

After a four-month suspension, China started publishing its youth jobless data again, with a new method of calculation that excludes students. The country's jobless rate for people between 16 and 24 was thus 14.9% in December 2023, a drop from the highest rate recorded last year, but still high.

Overall, China's three core growth engines - infrastructure investment, real estate development and exports - are losing steam. In 2023, property investment fell 9.6% and property sales by floor area fell 8.5%. Some industry practitioners even said that "all three engines are gone".

Looking at the official figure of 5.2% growth, China's dollar-denominated nominal GDP in 2023 actually dipped 0.5%, the first decline in 29 years, representing a further widening of the gap between the size of the US and Chinese economies.

To make matters worse, China's National Bureau of Statistics announced on 17 January that China's population dropped by 2.08 million to 1.40967 billion in 2023, the second consecutive year of population decline and well above the population decline of 850,000 in 2022.

With the slew of bad news, the mainland Chinese and Hong Kong stock markets both tumbled on 17 January. Although Chinese officials asserted that the country has surpassed its growth target with a 5.2% expansion, the market does not think there will be any sustained improvement in the Chinese economy anytime soon. Structural problems such as the lack of domestic demand in the Chinese economy, the pangs of economic transition, geopolitical risks, and the lack of confidence have left no room for optimism.

As for the core of the problems, various academics as well as the Central Economic Work Conference held in mid-December 2023 have all raised several points, including "insufficient effective demand", "weak social expectations", "impediments to domestic circulation", "complex, severe and uncertain external environment" and so on.

All this makes it clear that the Chinese economy is caught in a conundrum due to both internal and external factors. Domestically, poor economic revitalisation among other reasons makes it hard to improve weak investor and consumer confidence; internationally, technological decoupling by the US on China and "friendshoring" measures in manufacturing have struck a critical blow at China's export advantage, weakening China's position in the international supply chain. China was once convinced that foreign investment could not leave China, but this turned out not to be the case.

For China and the Li Qiang government, the situation in 2024 will only get more difficult.

First, the real estate sector would be unable to rise above the doldrums in the short run, while the "decoupling" measures and tech blockade that the US has adopted towards China is only the beginning, while the Red Sea crisis means shipping costs have skyrocketed, which will add to the problems for China's exports. The Chinese government has pinned their hopes on the green energy sector which includes electric vehicles and new energy and materials. While performance has been stellar for the last year or so, in the short term it cannot take the place of the real estate sector in plugging the gaps in economic growth and unemployment.

For China's economic growth in 2024, most international firms have predicted a growth of 4.5% to 4.9%, lower than that in 2023 - and this is assuming that the government would continue with moderate measures to spur growth, such as issuing a new batch of special refinancing bonds for local governments, and continuing to provide support for consumption and the real estate sector.

In fact, if Chinese economic growth can stabilise at around 4.5% this year, it will also spur the global economy. An optimistic view predicts a gradual stabilisation of consumer confidence and investment, while supply and demand figures from the real estate sector have shown that its problems would be resolved in two to three years.

As for foreign investment, besides US firms that are trying to move their funds elsewhere as they are directly impacted by the China-US competition, most large foreign investors are in the wait-and-see phase - neither pulling out existing funds from China nor investing new funds in the country.

As a large economy, China does indeed have a strong domestic force that makes it hard to give up. For businesses, a temporary hurdle is not a big deal - the key problem is that local and international people and businesses are sceptical about the path the country has chosen, which is holding back investors.

The question on some people's minds is: does the Chinese government still believe in a market economy? Businessmen are quietly saying: "We can deal with the problems of economic development; we just have to hold out for a few years. But the uncertainty with policy is on another level - how are we to predict what happens next?"

This article was first published in Lianhe Zaobao as "李强政府的第一份经济成绩单".

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