Against the backdrop of the recent reopening after three years of zero-Covid policies, the Chinese government, in the last government report of Prime Minister Li Keqiang before retiring, has underwhelmed observers with a growth target of around 5% in 2023, lower than that of last year (5.5%) and clearly lower than expected GDP growth for India in 2023 (6.1% according to the International Monetary Fund). This is all the more surprising if one considers that India has already fully enjoyed the positive impact of the reopening from Covid, while China should benefit from the reopening only this year. And still, growth will remain rather meagre for a very simple reason: The Chinese economy is in a process of structural deceleration while India is still enjoying the demographic dividend.
Still, China’s outgoing Prime Minister, Li Keqiang, has clearly been cautious on the growth target this year and the question is why. First and foremost, the Chinese government, especially the new Prime Minister Li Qiang taking over during this Congress, does not want to run the risk of undershooting its growth target again as it happened in 2022. Even if consumption is recovering, external demand remains weak, and it is hard to know whether private investment will indeed jump up given doubts about the role of the private sector in the Chinese economy as well as an increasingly cautious sentiment by foreign investors. Furthermore, the real estate sector is still dragging down growth.
Beyond 2023, the government’s push for a structural shift of the Chinese economy is still on the way. Over the last few years, tighter regulatory measures have been introduced to contain financial risk and achieve more social objectives (green economy, food security, etc.). This is an important signal of the Chinese government’s recognising that too high growth is no longer possible nor is it desirable as it only pushes further financial imbalances. In fact, sustainable growth has become a key concept in China’s new economic narrative. It is hard to tell if this relates to the government’s firm belief that the quality of growth is what matters the most for Chinese citizens today or, rather, the recognition that pushing up growth too much is only going to create additional imbalances.
Against such backdrop, job security is clearly one of the most important objectives surrounding the sustainable growth narrative, which is enshrined in a higher target for new jobs, namely 12 million, compared to the last past years (11 million, except for the even lower target in 2020 after the Covid-19 broke out in China). The lift of the employment target reflects the government’s concern about the job market, especially for young workers, whose unemployment rate reached almost 20% during the spring of 2022. The need for jobs explains China’s recent charm offensive to keep foreign direct investment in China as it is an important source of job creation. The current winds towards supply chain diversification are actually not going to help China fulfill the employment objective since investors are looking for new pastures with India as a major beneficiary.
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India also needs to create as many jobs as possible (at least 13 million a year, i.e. even more than China). Foreign investors are starting to contribute more substantially to job creation in India, which — given its sheer size both in terms of market size and labour force — could pose challenges for China as it tries to keep its foreign direct investment within the country. The forces pusing foreign investors out of China are plentiful at this juncture, from US containment at the highest end of the value chain, which is forcing bifurcation, to higher wages at the lowest end. In addition, China’s push for self-reliance is certainly not helping with foreign investors’ future plans in China.
All in all, the 5% growth target is consistent with the current challenges facing the Chinese economy as well as the government’s more diversified objectives beyond economic growth. Creating more jobs is a quintessential part of China’s new sustainable growth narrative but China is confronted with more competition than before, especially from India because of its market size and the large labour pool. While India and China may not be too different in size and population, growth prospects differ substantially. At the ongoing National People’s Congress, outgoing Premier Li has had to lower the GDP target further while India remains resilient. An acceleration of this pattern is to be expected in the next few years, especially if the reshuffling of the value chain continues, pushed by geopolitics and high costs in China.
The author is Adjunct Professor at the Hong Kong University of Science and Technology.
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