Over the past two years, China’s economy has experienced very little growth, coupled with an exodus of foreign firms. Beijing is attempting to entice foreign businesses back to China, yet there has been no indication of substantial structural reforms or efforts to address the underlying issues that drove them away. China’s net investment is at a 30-year low, remaining in negative territory since last year.
Neither the Two Sessions of the National People’s Congress (NPC) and the Chinese People’s Political Consultative Conference (CPPCC), nor the China Development Forum (CDF) have yielded any tangible strategies or policy changes that inspire confidence in an economic rebound.
As a result, the lack of concrete outcomes or specific information from these high-level meetings suggests that the likelihood of foreign companies returning, as well as foreign direct investment (FDI) flowing back into the country, remains uncertain, thus impeding any potential economic recovery.
The Two Sessions, which ended on March 11, sent mixed signals regarding the economy. Beijing set a growth target of 5 percent, considerably lower than what it would have deemed acceptable five years ago. However, even this modest goal will be difficult to attain.
The World Bank has forecast China’s GDP growth this year will be 4.5 percent. Many experts believe the only way for Beijing to revive the economy is through stimulus measures, but even with stimulus, they are pessimistic about its prospects. However, Beijing has not announced a large stimulus package, making a potential recovery even more elusive.
Years of COVID-19 lockdowns, along with an economic slowdown and rising youth unemployment, have reshaped consumer behavior and spending patterns.
Despite Chinese President Xi Jinping’s (習近平) longstanding goal of transitioning the economy toward consumption rather than export focus, Chinese citizens simply are not spending.
Most families find the bulk of their wealth tied up in the embattled real-estate sector, while young people struggle to save for home ownership.
Meanwhile, the mounting debt burden carried by developers is starting to take its toll, with even major realtors defaulting. A banking crisis has been brewing for some time, posing a threat to the entire economy.
Beijing has signaled that it will not intervene to rescue the property sector, indicating that defaults and bankruptcies are only just beginning. This trend of defaults is not going unnoticed by ordinary Chinese, who are losing their deposits on home contracts. This serves as one more reason for people to hold onto their cash rather than consume.
The China Development Forum was intended to attract CEOs and encourage foreign companies to return to China.
However, the forum will probably have little impact because the concerns of foreign business leaders remain unresolved. Labor and operating costs in China have been steadily increasing.
Despite this, companies persisted in manufacturing in China because the costs could be offset with domestic sales there.
With the domestic market now slowing down and Chinese consumers gravitating more toward bargain merchandise and domestic brands, there is less incentive for operating in China.
Multinational corporations now have to reassess how they compete in China, while also adjusting their growth and profit expectations.
Last year, the 18 largest foreign firms in China reported a decline in revenues, with some experiencing drops as significant as 20 percent.
Some sectors, favored by Beijing, will receive government support and are expected to remain robust. However, opportunities for foreign companies in China will become more selective.
Xi is advocating his new economic mantra of “new productive forces,” which refers to the technologies China is harnessing to achieve innovation-led growth.
This approach will enable China to upgrade its industrial sector, enhance its self-sufficiency and meet national security objectives, all while enhancing China’s global competitiveness in strategic sectors.
Chinese Premier Li Qiang (李強) has referred to this concept as a “new leap forward,” emphasizing cutting-edge technologies such as electric vehicles, new materials, commercial spaceflight, quantum technology and life sciences.
The push for new productive forces mirrors many other policies in that it lacks specificity. It remains unclear how the government will achieve these goals.
Moreover, the shift toward new technologies will likely be government-led and funded, thereby steering the economy back toward central planning and away from free markets.
While there might be investment opportunities in these sectors for foreign CEOs who attended the forum, they might also face restrictions due to the close ties of these sectors to state objectives. Consequently, foreign investors and joint ventures might find limited access to these sectors.
Beijing apparently deems the CDF successful. The State Council of the People’s Republic of China issued a statement claiming, “Speakers at the CDF have repeatedly highlighted China’s commitment to further opening up, affirming the country’s willingness to offer more opportunities for foreign investors to engage in deeper operations here.”
However, even at this conference, there were instances of censorship. Morgan Stanley Asia economist Stephen Roach, previously considered a “good friend” of China, was prohibited from discussing Hong Kong in his speech at the CDF.
The forum aimed to reassure foreign business leaders that China was open for business and that they need not fear the new counterespionage law or Article 23 in Hong Kong.
There has been concern that these laws are so stringent that even printing documents or sending emails to foreign colleagues could be interpreted as illegal activities.
In response, the State Council issued a 24-point action plan, detailing how China plans to treat foreign companies more fairly and protect intellectual property rights. It also sought to downplay the risk of arrest.
However, with the new law making the leaking of “work secrets” illegal, the risk has undoubtedly increased, despite the action plan.
The shift toward the New Productive Forces highlights two important points:
First, it indicates that Beijing will continue to rely on export-led growth and manufacturing to drive economic expansion.
Second, the government’s subsidization of research and development means that funds will be redirected from taxpayers to the government at a time when most analysts believe Beijing should be transferring money from the government to taxpayers to stimulate consumption.
This emphasis on technology also suggests that Beijing might not take action to address structural issues in the economy, such as the looming real-estate and banking crises.
Furthermore, there are indications that the economy will become less free and more under government control, which could further discourage foreign investment and the return of foreign companies.
Antonio Graceffo, a China economic analyst who holds a China MBA from Shanghai Jiaotong University, studies national defense at the American Military University in West Virginia.
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