China’s Two Sessions meetings have ended, and it would be a real stretch to say that they mark a major change in Beijing’s economic policies. Beijing set a GDP growth target for 2025 of 5%.
This of course wasn’t a surprise, especially as the weighted average of the provincial GDP growth targets set in February came in at around 5.2%. That is why most analysts assume that this target was effectively decided months ago.
Li Qiang noted that this would be an especially difficult year. In most countries, we would expect GDP to be higher when conditions are good and lower when they are bad, but his point was that whatever the conditions, China had already determined its economic growth rate.
This shows how different the concept of GDP is in China than elsewhere, where GDP growth is an output measure, calculated at the end of the period after the economy has done what it has done.
In China, it is an input measure, determined at the beginning of the period.
One way of understanding this is by considering that to the extent the part of the economy that operates under hard-budget constraints (i.e. cannot sustainably engage in non-productive spending) is unable to achieve the growth target – and it clearly can’t – an increasing amount of economic activity will shift to those parts of the economy that don’t operate under hard-budget constraints, which means that economic activity is increasingly transferred to government and to favored sectors that receive unlimited funding from the banking system.
This in turn means that a meaningful part of economic activity this year will again be in the form of non-productive investment funded by debt, and that is why for all the recent talk of reviving the private sector, activity in the Chinese economy must continue to shift away from the private sector. This excludes favored sectors, of course, whose ability to access cheap credit is implicitly or explicitly guaranteed by local governments or SOEs who want to see production expand even if this results in losses.
And because non-productive investment by definition cannot generate sufficient growth to service the debt, we should expect to see another sharp rise in China’s debt-to-GDP ratio this year.
China’s economy in 2025, in other words, will look a lot like its economy in 2024.
I would add that Trump’s tariffs will likely have no impact this year on reducing the US deficit, and so will also have no impact on reducing China’s surplus. We should consequently expect a lot of confused stories this year about the “resilience” of China’s export sector.
Pettis makes some predictions based on the recent two sessions
when he says this:
This excludes favored sectors, of course, whose ability to access cheap credit is implicitly or explicitly guaranteed by local governments or SOEs who want to see production expand even if this results in losses.
reminds me of what people used to say about fracking during ZIRP. Or social media I guess. Drill more wells, get more users, even if you’re losing money on each one, investors would throw money at whoever was losing money on the most units. Hard to say how this worked out. The US is supplying Europe with fracked gas now, probably whoever expanded production back net is making money now, but bankruptcies in between may have meant that the investors who funded it never got any return.
favored industries include solar panels and batteries, and as Tooze has commented, it feels weird to say there’s too many solar panels, from a certain perspective clearly there aren’t enough. But obviously you have overcapacity if there’s more production capacity than sales. The world needs to phase out coal, and many countries including China need to drastically increase per capita energy use. THe way to do that right now is AMerican gas and CHinese solar panels, way to do it in the future is Chinese batteries, CHinese solar panels, and nuclear plants that are probably also Chinese though I’m hoping the American companies can get their shit together.
So it’s kind of weird to think that this can still be part of the “non-productive investment” that Pettis is talking about. Because, yeah, the price people are able to pay for these things may not really be paying for the investments that are being made to produce them.
But it’s easy to take the Chinese planner’s perspective, and say obviously this is the future so it has to be made in China.
right, only question is whether the rest of the world accepts that or decides to compete in a race to the bottom.