When China publishes the final version of its latest five-year plan this week, it will target its lowest economic growth rate in a quarter of a century.
That’s not necessarily good news for the rest of the world.
At the opening session last week of the National People’s Congress, China’s Premier Li Qiang, speaking before President Xi Jinping and thousands of party delegates, said that the official target for GDP growth would be 4.5 per cent to 5 per cent. That’s the lowest goal since 1991 and a modest downgrade from last year’s target of “around 5 per cent,” a target China said it achieved.
The downgrade comes amid a turbulent geopolitical and world economic environment, with Donald Trump’s trade war on everyone and America’s increasing military adventurism causing a remaking of international trade patterns and, with the war in Iran, threatening global energy supply and economic growth.
“Geopolitical risks are rising. Global economic momentum remains sluggish, while multilateralism and free trade are under severe threat,” Li told the congress.
At the same time as the outlook for the global economy has become uncertain and threatening, China’s domestic economy remains weak and unbalanced, with the supply of goods outstripping demand and exports providing a safety valve that is, however, leading to increased trade tensions with countries other than the US.
On some estimates, more than 50 countries have now enacted measures to protect their economies and local manufacturing bases from being overwhelmed by the tide of cheap Chinese goods.
That tide is still flowing, with data released last week showing that exports surged 21.8 per cent in the first two months of this year. China’s trade surplus for those months was up 25.3 per cent to a record $US213.6 billion ($300 billion).
Last year, China recorded a record annual trade surplus of $US1.2 trillion, despite Trump’s tariffs, by redirecting exports diverted from the US to other markets – hence the rising trade tensions with economies ranging from the European Union to South-East Asia and South America.
China hopes to defuse some of those tensions by increasing its imports from the rest of the world, with Li making that one of the objectives in this year’s planning, saying China would proactively open up its markets and promote more balanced trade.
Imports were up almost 20 per cent in the first two months of the year, although they were boosted by a near-16 per cent rise in fuel imports as China stocked up in anticipation of the conflict in the Middle East.
China, the world’s largest oil importer, has a strategic reserve of somewhere between 1.2 billion and 1.5 billion barrels of oil and has been increasing the electrification of its economy at an accelerating pace to reduce its vulnerability to imported energy.
While its exports are booming (and generating increased protectionism elsewhere), the domestic economy is still struggling from the 2021 collapse of its property market. Housing prices have fallen more than 30 per cent since 2021 and a sector that once produced 25 per cent to 30 per cent of China’s economic growth has roughly halved its contribution, which has flow-on effects to household wealth, confidence and spending.
Li said the market was still in “a period of adjustment” and as the “imbalance between strong supply and weak demand is acute”, Beijing would maintain (albeit at a reduced level) the trade-in policies it has been deploying to try to stimulate domestic consumption.
It is seeking a “notable” increase in domestic consumption, although it isn’t yet apparent how it will try to achieve that, other than vague references to boosting employment and household incomes through social security and government transfers.
It’s not that Chinese consumers don’t spend – consumption accounts for about 40 per cent of GDP –but rather that growth in consumption lags the growth in investment that has been heavily subsidised by the various layers of government.
That has led to over-capacity, intense competition and price wars between domestic manufacturers, the surge in exports that has alarmed other countries and deflation in the domestic market.
In the latest five-year plan, Beijing is foreshadowing a reduction in its subsidies (which the International Monetary Fund has estimated amount to about 4 per cent of China’s GDP), singling out solar panels and batteries, with a new focus on exports of artificial intelligence, green energy equipment and other high-tech goods and services.
In the face of Trump’s “America First” approach to trade, China is also doubling down on its efforts to promote technological self-sufficiency and superiority. It wants to reduce its dependence on, and vulnerability to, advanced technologies sourced offshore.
Artificial intelligence, quantum computing, bio-manufacturing, 6G mobile networks, robotics, pharmaceuticals, advanced semiconductors, hydrogen and fusion energy and brain-computer interfaces are all sectors targeted by the new plan.
Xi Jinping has said previously that China needs to expand the advantages it has in a range of the 21st century technologies and their supply chains, including its dominance of strategic minerals. A key element of that plan is to embed AI throughout the economy, with a stated goal of integrating the technology into 90 per cent of the economy.
There is a window of opportunity for China, while it maintains its stranglehold on the rare earths and other minerals vital to most advanced manufacturing (and military hardware), to enhance its lead in advanced manufacturing before the efforts by the US and others to develop alternative sources of supply that will erode its dominance of the raw materials for 21st century technologies.
Beijing’s ability to direct its companies and its provincial and local governments to support its strategies, while it can lead to significant inefficiencies, also means that its plans are executed in a way that doesn’t happen within Western economies. Chinese companies and officials do what they are told.
The call for a massive focus on advanced technologies will be answered and will almost inevitably produce results, including a shift in over-capacity – or maybe just an extension of it – from existing industries into the new sectors, with another wave of high-tech exports hitting global markets.
Just as China is pursuing self-sufficiency in technology, it is also seeking to bolster its energy security, with the war in Iran giving that goal a heightened focus.
It is seeking to increase domestic oil and gas production, including an expansion of coal-to-oil projects, with an ambition of increasing domestic energy production from the equivalent of just over 5 billion tonnes of coal last year to 5.8 billion tonnes by 2030 while also continuing to expand its already significant base of clean energy.
More than half its existing power generation is from non-fossil fuel sources. So while it’s not immune to the disruption to oil supply caused by the war in Iran’s closure of the Strait of Hormuz, its reduced reliance on oil and gas and its oil reserves means China is better placed than most of the major economies to weather prolonged disruptions to global oil supplies.
The new five-year plan, it seems, won’t contain any material departures from the strategies initiated by its predecessors which, given that Xi has presided over four of them – about to be five – isn’t surprising.
For the rest of the world, China’s lowered targeted growth rate for an economy facing deflationary and demographic threats while continuing to invest heavily in its industrial platform probably means lower global growth and the continued dumping of China’s excess industrial capacity into global markets that are already fearful of being de-industrialised.
Premier Li might have bemoaned the threats to multilateralism and free trade at the outset of the congress, and America might have been the major culprit thus far. But with its five-year plan’s new targets, China will play a part in generating the ever-increasing trade imbalances that are threatening growth and jobs around the world.
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Stephen Bartholomeusz is one of Australia’s most respected business journalists. He was most recently co-founder and associate editor of the Business Spectator website and an associate editor and senior columnist at The Australian.Connect via email.
