This Week at Takshashila's China Desk
Covering Chinese chatters (discourses, narratives, policies and rhetoric) on external events and actors, military and security issues, economy and technology, and bilateral relations with India.
Guarding the Great Wall #1: Overviewing the ‘Two Sessions’
To begin with, in a bid to review all the many developments that took place at the ‘Two Sessions’, the second joint annual meeting of the 14th National People’s Congress and the 14th Chinese People’s Political Consultative Conference, Anushka Saxena (Takshashila Institution Research Analyst) hosted Manoj Kewalramani (Fellow, China Studies) for a podcast episode on ‘All Things Policy’, the Institution’s daily public policy podcast.
Below is a transcription of the key discussions from the episode that may be of interest to our readers:
Anushka: This was the two sessions of many firsts. The first time the new Chinese Premier Li Qiang presented his government work report. Also the first time the premier didn’t have a press conference at the end of the NPC, and the first time the ‘new quality productive forces’ terminology became part of the annual priority agenda of the government, even though it’s not really the first time the phrase itself has been used officially. So Manoj, if I may come to you and ask my first question – What is this government work report that the Premier presents? And what does it tell us, especially vis-a-vis China’s economy security or domestic policy prerogatives for 2024. More specifically, what do you make of the much awaited GDP target that has been announced as part of this report, which is 5% for 2024?
Manoj: I think that people should look at this week of the Two Sessions of the NPC and the CPPCC as essentially a mix of pageantry along with some substantive work. For Indian listeners, it’s sort of like the Indian budget being presented but it’s also sort of like the [American] state of the union. Although it’s not the top political boss delivering it. But that’s essentially what the government work report is sort of like right? Although it doesn’t necessarily talk about specific [budgetary] allocations. But it talks about policy priorities.
At the same time you get some data points about, what are the targets for economic and social development for the year ahead? So if you want to understand in which direction economic policy is going to go, this is the document that I think is useful. It also has again legal implications because in some things you might want legal regimes to be created and that will also be reflected in this although there’s a separate document that comes out which is the NPC work plan, which is presented by the leader in charge of the NPCSC during this week, that lists out the legislative priorities.
There’s a GDP target which everybody looks at every year because it tells you a little bit about how the leadership is thinking about what kind of goals they want to achieve but also if you set a certain kind of GDP target it also has implications for government spending. It also sends an indication to local governments as to what they need to do and what is a preferred sort of goal right? So local political incentives are set up based on that so I'll give you just a flavour of what in what kind of targets we sort of see in the work report.
Li Qiang this time talked about what is the deficit to GDP ratio for the year, what kind of special bonds will be issued, what kind of allocation the the central government will make for local governments, what is the grain output target for the year; there will be data on say what are the kind of what is the sort of inflation target for the year.
The GDP target creates a certain kind of pressure on government spending at a point of time where China needs to shift away from its old model of supply-side investment-driven growth. It would have been better if you had not announced that GDP target but I understand why it’s announced. It creates a benchmark for local governments and so on and so forth. My brief take is that I agree with the idea that this is a target without a plan. It’s not clear as to how you’re going to achieve this target if the spending allocation that we see which he outlined in his speech. Let’s say you set a deficit-GDP ratio of 3% which is exactly what the target was last year although it was increased to 3.8% in October after they issued a trillion RMB worth of extra bonds. This year they’re saying same 3%, and at the same time they’ve allocated an additional one trillion RMB worth of ultra-long-term bonds which will be used for specific purposes. This is not included in the budget deficit. So I presume there is some room later on to maybe increase spending, but even if you take all of these numbers together, you don’t necessarily get the sense of how major reforms will materialise.
Anushka: Wang Yi’s press conference was interesting, where a lot of the foreign policy goals were discussed. I think he talked about everything under the sun from what China and ASEAN need to do to maintain peace and stability in the South China Sea to what China’s policy on brokering peace in the Ukraine war has been. Manoj, did anything stand out to you? What would you say are emerging as priorities for Chinese foreign policy this year?
Manoj: A lot of it is repeated usage of certain language. But I think that there were some interesting things in what he did say, right? For example, for starters I think from an Indian point of view, it’s really useful to note that there was not a single mention of India in this entire conversation. Which is something that we need to note. It's a reflection of the nature of the bilateral relationship – it is not like India is usually high priority. You tend to sometimes get questions from an Indian journalist, but of course, this is very choreographed.
From a narrative point of view, some things were really impressive. I’ll quote some bits of it where he says that, you know, if the US becomes nervous and anxious at the mention of the word China, then what does that tell you about the confidence of a major power? If the US is only focused on its own prosperity and does not allow others to develop legitimately, what does it tell you about international justice? So I think that Wang Yi gives these sort of rhetorical flourishes.
On ties with Russia, he talks about the relationship being at a really really good place. Again, I’ll quote this, “As major powers, China and Russia have created a new paradigm of major power relations, which is completely different from the cold war era.” So he’s basically saying we’re not allies, but that there is a different proximity to this relationship which is not akin to an alliance – that means that expectations are very different. He also says that the primary objective in this context with ties with Russia is to make sure that you end up creating a multipolar, more democratized international order, and maintain global strategic stability amongst major powers. So it tells you a little bit about what the relationship is like.
Anushka: That’s actually a lot of important points of note and you know now that I think about it, even on Taiwan, that was a very interesting comment that Wang Yi made and this is a loose english translation, where he said that “I believe that there will be a family photo of the whole international community in which all members uphold the One-China principle and it is only a matter of time.” So essentially that kind of tells you that there are more more of Taiwanese diplomatic allies to be poached and the mission is not over yet.
For more, tune in to All Things Policy!
Econ Special #1: Diving into China’s GDP Figures
Further, responding to Premier Li Qiang’s announcement of a 5% GDP target at the recently concluded ‘Two Sessions’, on March 11, Amit Kumar (Takshashila Research Analyst) published an elaborate commentary with Foreign Policy on ‘The Hidden Dangers in China’s GDP Numbers’.
So what are these hidden dangers? Some excerpts below:
China’s recently announced GDP target for 2024 remains unchanged from last year, at 5 percent. But even if the country hits that number, its economic problems run deep. In January, China published economic data for the last quarter of 2023 which put its annual GDP growth rate at 5.2 percent, beating the government target. Yet, to put things in perspective, China’s real GDP growth rate from 2011 to 2019 averaged 7.3 percent while 2001-10 saw average growth of 10.5 percent.
After the figures dipped in 2020 to 2.2 percent owing to COVID-19, expectations for post-pandemic recovery were high. This was rooted in the assumption that China lifting its dynamic zero-COVID policy in January 2023 would unlock pent-up demand in the economy, which remained suppressed during the two-year-long lockdown. But that hasn’t happened. Some observers even doubt the recently released GDP data’s authenticity and suspect the numbers are far below the official figures.
But even if the figures are accurate, the wider trends of the Chinese economy suggest a worrying state of affairs. To begin with, this was the first time since 2010 that China’s real GDP growth rate exceeded its nominal GDP growth rate (4.8 percent). The nominal growth rate is calculated on the previous year’s numbers without accounting for inflation. Discounting inflation is necessary to remove any distortion arising from a mere increase in the prices of goods and services. Thus, the real GDP figure is calculated after adjusting for inflation to reflect the increase in output of goods and services. This is also the number economists and governments refer to when stating GDP growth numbers.
Usually, the nominal growth rate should be higher than the real growth rate. But in a deflationary year, the real growth rate can give a distorted picture, because deflation or negative inflation amplifies the real numbers. Thus, the fact that China’s real GDP number exceeded its nominal number indicates that Beijing’s gross value of output in real terms was amplified thanks to negative inflation, i.e. a general decrease in the prices of goods and services. If not for deflation, China’s real GDP growth in 2023 would have been even lower and would have certainly missed the national target of 5 percent.
The news on China’s gross fixed capital formation (GFCF) isn’t encouraging either. The term refers to the acquisition of fixed assets such as land and machines or equipment intended for production of goods and services. It is one of the four components of GDP (besides exports, household consumption, and government expenditure) and a measure of investment in the economy.
For decades, China relied on a high GFCF rate to power its economy, but it has witnessed a sustained decline under President Xi Jinping’s leadership. For reference, the GFCF growth rate in the last 9 years (2014-22) averaged 6.7 percent as compared to 13 percent in the 21 years before that (1994-2014). It hit over 10 percent only on four occasions in the last nine years, once in 2021 thanks only to a significantly low base due to the pandemic year.
In part, the drop in investment can be attributed to the conscious decision of the central leadership under Xi to deflate the property bubble, which had become unsustainable, and reallocate and redirect capital from speculative to more productive forces. The decelerating impact this decision has had on China’s GDP has forced leadership to reverse its policies to some degree, trying to prop up the bubble. But the forced deflation is now proving too resistant to change, as is evident from the 2023 numbers that suggest the real estate sector shrunk by 9.6 percent.
But that’s not the only reason for the drop in investment. In the past year, China’s economy has witnessed an increasing securitization of its development. On numerous occasions, including at the 20th Party Congress in 2022 and the Two Sessions in 2023, Xi has underlined that the idea of development cannot be isolated from that of security. In a meeting of the Chinese Communist Party’s National Security Commission last year, Xi reiterated the need to “push for a deep integration of development and security.”
The government has issued repeated assurances to both domestic and foreign investors to improve the business environment and spur investment. However, investment in fixed assets by private holding companies has been declining since 2018. It briefly rebounded in 2021, only to drop again in 2022. The data for 2023, although not yet updated, is unlikely to pick up.
The data on China’s net exports suggests their contribution to GDP, although steadily picking up since recording a low in 2018, is unlikely to return to the glory years of 2001-14. While China will continue to be a leading export nation, the contribution of net exports to its growth rate might not be high. Poor external demand also means that export-oriented investments will see a decline, thereby pulling the overall investment rates further down albeit with a lag.
China’s strategy in the wake of this situation has been to seek to boost domestic consumption and household spending. Yet for domestic consumption to emerge as a new engine of growth requires not only sustaining its previous momentum but also increasing its share as a percentage of GDP to compensate for the loss of growth due to falling investment (in property and export-oriented sectors) rate.
However, a look at China’s household consumption expenditure as a percentage of GDP suggests that it has remained significantly low compared to other consumption-driven advanced and emerging economies. For instance, in both the United States and India, household consumption makes up more than 55 percent of GDP. In contrast, China’s household consumption has historically hovered around 40 percent—and dropped to 37 percent in 2022.
Thus, domestic consumption seems unlikely to be able to fuel China’s growth. The rising unemployment rate, declining consumer confidence, ageing population, and rising dependence ratio will further burden any attempt to raise China’s consumption.
These trends may be baked in the near to medium term. China will not see a return to the high growth rates witnessed in 1980-2010 and will instead stabilize near 4 percent. This will likely derail China’s plan to transition from a middle- to a high-income country and certainly dent Xi’s dream of transforming China into an advanced socialist country. The much-dreaded fear of the “middle-income trap” is real for China.
Guarding the Great Wall #2: Stressors in the China-Taiwan Dynamic
Next, amidst evolving China-Taiwan relations, in a long-form commentary for Modern Diplomacy, Anushka Saxena wrote on the stressors that can make or break the cross-straits status quo. The piece revolves around the central argument, that ‘Cross-Straits Relations have become more Dynamic and Volatile – and There are Four Reasons Why’.
Some excerpts below:
Contemporary China-Taiwan cross-Straits relations have become a significant defining feature of regional security and stability in the Indo-Pacific, and are an equally important bone of contention in the US-China relationship. However, trends from this past decade indicate that cross-Straits dynamics are being shaped not just by unpredictable trigger events, but by four persistent and fundamental factors – political changes brought about by the rule of the Democratic Progressive Party (DPP) since 2016, a strengthening sense of social identity in the Taiwanese population, increasing proximity between Taiwan and the US, and increasing Chinese power and assertiveness under Xi Jinping.
DPP’s China Policy – a Fundamental Departure from the Past
Since 2016, Tsai Ing-Wen has assumed the post of President and led her party, the DPP, to a majority victory in the Taiwanese legislative yuan, twice. In these eight years, the island’s China policy has become sterner, marking a stark shift away from the Kuomintang party (KMT)’s own eight-year-long policy of engaging in continued dialogue and maintaining open lines of communication and negotiation with China. Under Tsai, the Taiwanese Mainland Affairs Council (MAC) has conceptualised DPP’s China policy as one that is centered around “peaceful development, equality, mutual benefits, and mutual trust.”
Flowing from the demand for mutual trust and peer equality with China, the DPP under Tsai has repudiated the ‘1992 Consensus’ (九二共識). The 1992 Consensus, unwritten in a single document but a key agreement between the two sides on the existence of ‘One China’, has proved controversial throughout the history of cross-straits relations because of differing interpretations of the phrase between the two sides (popularly known as ‘One China, different expressions’, 中各表; or ‘One China, respective interpretations’, 個中國各自表述). However, in China’s interpretation, Taiwan is a breakaway province and a subservient party in the greater Chinese nation, with the Communist Party (CPC) being the legitimate leader of the ‘One China’. This interpretation has been unacceptable for the DPP, even though their predecessor, the KMT, was willing to look past it to maintain a functional relationship with China. Now, the DPP is enhancing Taiwan’s sovereign identity, and rejecting the idea that the government of the island, in any way, is subservient to the CPC.
Strengthening Sense of Social Identity in the Taiwanese Population
Within the Taiwanese population, a strengthened sense of sovereign identity is taking shape, which has led to a majority to reject the idea of any changes to the status quo in cross-Straits relations, or the Chinese proposition that the “one country, two systems model” will be beneficial to “compatriots” on both sides.
In this regard, key findings from surveys such as the ROC Mainland Affairs Council (MAC)’s March 2023 opinion poll on ‘Public’s View on Current Cross-Strait Relations’, and the National Chengchi University Election Center’s Survey from June 2023, present important insights. The MAC survey, for example, tells us that an overwhelming majority of the surveyed population (about 80 per cent) disagree with the “one country, two systems” model, and 89 per cent of them support the maintenance of the status quo. Similarly, the Election Center Survey indicates that 62.8 per cent of the surveyed population believes that their identity is ‘Taiwanese’, and not ‘Chinese’, or even ‘both Chinese and Taiwanese’. In this light, a majority of the Taiwanese population seems to be moving significantly away from the CPC’s expectations in how it identifies itself and what future it envisions for cross-straits relations (i.e. one where there is no room for reunification).
Increasing Proximity between the US and Taiwan
In the past few years, the US and Taiwan have developed closer relations as part of their bilateral efforts to counter Chinese aggression, and to also promote shared democratic values. This proximity has manifested itself in enhanced efforts to deepen political, trade, defence, and people-to-people ties. In some instances, it has also invited a starkly aggressive response from China.
A key feature of the deepening defence ties, is that American arms sales to Taiwan have become more frequent and greater in volume. And this phenomenon precedes Joe Biden’s presidency in the US – under Donald Trump’s presidency, for example, eight sets of arms and defence-related transactions with Taiwan took place in 2020 alone, amounting to approximately $5.9 billion worth of transactions. Under Biden, there have been 15 such transactions since 2022, worth approximately $4 billion. These transactions are diverse, too, ranging from sales of hard equipment such as main battle tanks and multi-role fighters and spare parts for wheeled vehicles, to transactions involving training of Taiwanese armed forces personnel.
Increasing Chinese Power and Assertiveness under Xi Jinping
Despite domestic economic headwinds and the existence of a hostile external environment where China has lost mutual trust with many of its neighbours, under Xi Jinping, the country remains committed to curbing any possibility of Taiwan’s independence or of enhanced international legitimacy for the island’s cause. However, the values and propositions underpinning Chinese vehemence on Taiwan are, of course, historical, and range from the CPC’s mission to achieve the “Chinese dream” of “Great Rejuvenation of the Chinese Nation” (中華民族偉大復興), of which reunification with Taiwan is a fundamental pillar. In the CPC’s conception, there is only ‘One China’, and Taiwan is a specially administered province of the mainland with no sovereign identity of its own. In this backdrop, the DPP’s policy approach to cross-Straits relations is viewed by Beijing as “secessionist” and even illegitimate, while any proximity between US and Taiwan is viewed as the violation of commitments made by the US to China under the ‘Three Joint Communiqués’ of 1972, 1979 and 1982.
Subsequently, China has adopted an arsenal of coercive measures to turn cross-Straits dynamics in its favour. Such measures can be divided into military, economic, and political.
As the world looks to the Taiwan Straits and the continually evolving policies and tactics of the stakeholders involved, there is a consensus emerging that any conflict in the region will have drastic global economic and humanitarian implications. Moreover, the four above-mentioned factors remain fundamental in the making or breaking of the situation in the Straits, and have created fault-lines that are not easily resolvable. In this regard, the hope for peace and stability lies in a few but major bets – that China fundamentally alter its position on use of force with Taiwan, taking into accounts the risks and costs of conflict, that the US’s deterrence tactics prove to be optimal, and that the Taiwanese population and political dispensation continue to support the status quo while investing in the island’s defence capabilities and diplomatic standing.
Econ Special #2: Leveraging Consumption in the India-China Relationship
Finally, Amit Kumar wrote a discussion document for Takshashila, on ‘Geo-consumerism and India-China Competition: A Comparative Assessment of Consumption Data’.
This document offers a comparative study of India and China’s consumption trends. The study attempts to compare the size and demography of the existing consumer base and the consumption expenditure. It reveals that India’s consumption figures are disproportionately higher than China’s for the size of its economy. It also finds that a large consumer market is not a first-order factor in influencing foreign investments in a country. Nevertheless, it can significantly influence the lucrativeness of a country if the first and second-order factors cease to be a differentiating factor among India’s competitors. This is a crucial determinant for the future of Indian geopolitics.
The deepening of the geopolitical contest between China and the US has initiated debates around de-risking and diversification away from China with several businesses pursuing a ‘China+1’ strategy. China’s domestic consumption (demand) has slowed down in the last two years and has failed to recover to pre-COVID levels. This is concerning for the Chinese leadership, which has been seeking to shift from an investment and export-driven growth model to one that is primarily driven by domestic demand. India on the other hand, has recorded a growth rate ranging between 6.5 to 7.5 per cent in the post-COVID period. India has also emerged as one of the options for Western businesses seeking to diversify and de-risk.
In this context, it becomes imperative to investigate the gap between the strengths and weaknesses of the two countries to arrive at a realistic assessment of the evolving situation. One of the key metrics to answer these questions is the comparative data on consumption in the two countries. So, what does the consumption story tell us about the deepening rivalry and competition between the two Asian giants?