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The author is a political economist at the University of California, Berkeley.
In early 2024, 14 provinces and cities in China will launch a series of “mega” projects, demonstrating an evolving yet sustainable investment-driven economic strategy. The vigor with which local governments pursue these projects shows that the country is struggling with economic growth, even though over the past 13 years many economists, including myself, have called for a shift to a consumption-led growth model. This suggests that it continues to rely on investment to support itself.
Although this strategy is not without flaws, it is somewhat reasonable in the current situation. Domestically, widespread mistrust among Chinese residents is holding back consumer spending, with a recent Peking University survey showing that consumer confidence rose slightly by 4.11% over the past six months. It is shown. Externally, geopolitical competition, the US-China trade war, and a possible recession in the euro area all pose challenges to the country’s external trade.
For Chinese government leaders, maintaining growth is of paramount economic and political importance. In their eyes, the most realistic way to keep gross domestic product (GDP) growth in the 4-5% range in 2024 is to strongly encourage investment.
However, this year’s local investment program represents a marked change in goals in contrast to previous efforts. First, the 2024 project has a distinctly scientific flavor, with an emphasis on new generations of information technology, biopharmaceuticals, artificial intelligence, and low-carbon energy. This signals an ambition to move up the value chain and develop new growth engines. Second, there is a focus on investing in public welfare. Third, there has been a noticeable decline in real estate investment projects. And finally, there is an increasing emphasis on private investment.
In the area of public welfare, local investments mainly target affordable housing, education, hospitals, and environmental projects. According to Chinese economist Yu Yongding, China still has large disparities in these areas compared to developed countries. These investments will also boost consumption and the country’s economic growth.
In the housing sector, inventory in 2023 reached its peak since 2017, boosted by a reduction in real estate projects. However, investing in technology projects and increasing private investment is difficult. In theory, investing in high-tech projects can have an immediate positive impact on GDP and increase overall productivity in the long run. As competition among major powers intensifies, it is also advantageous for China to achieve independence in core technologies.
However, high-tech projects typically have long cycles, low input-output ratios, and no guaranteed returns. Large-scale investments over long periods of time also create significant overcapacity in areas such as solar energy, hindering productivity gains.
Expanding private investment also brings challenges. Where will the money come from to invest in private companies? Liquidity is a big issue for many of these companies in China, and Chinese banks have traditionally been reluctant to lend to private companies.
To make matters worse, many large projects will be financed with municipal bonds. New special local bonds are expected to reach about 4 trillion yuan ($560 billion) in 2024. However, increasing special bond issuance by local governments to support investment in large-scale projects is unsustainable given declining tax revenues, declining land concession fees, and already high local debt levels in China. It is.
Beijing is at a critical juncture. To steer the country’s economic trajectory, the central government must severely rein in the growth in local bond issuance. Significant funding should be provided, for example in the form of special bonds, to support not only high-tech investments but also broader infrastructure investments. It’s not just about increasing spending. It’s about spending smarter. Without a system to ensure efficient and high-quality infrastructure investment, China will continue to make unproductive investments.
In the long term, the best strategy involves structural reforms aimed at eradicating local protectionism, fostering fairer markets, and ensuring housing affordability. Fairer markets mean creating an environment in which small and medium-sized private enterprises can secure bank loans and participate in competitive bidding processes in the same way as state-owned enterprises.
This requires a strong political will and vision that aims not just for immediate growth but also for sustainable and inclusive development. But so far, no transformative change seems imminent for China this year.