Economy, Talking Point

Prime minister’s questions

Li Keqiang tackles old problems as his 10-year premiership draws to a close

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President Xi Jinping arrives at the National People's Congress (NPC) second plenary session in Beijing

When Li Keqiang met the press as the Chinese premier for the first time in March 2013, he vowed to keep the economy growing by continuing with market reforms and promoting social fairness.

“Sometimes stirring vested interests may be more difficult than stirring the soul,” he told the gathering of Chinese and foreign journalists. “But however deep the water may be, we will wade into it because we have no alternative. Reform concerns the destiny of our nation.”

As the prime minister Li is nominally the principal advisor to Xi Jinping, the Chinese president and he holds the highest rank in the civil service of the central government. Back when he began in the job, questions were being asked about how the government would keep the economy firing as the pace of growth slowed. After double-digit GDP expansion in the previous decade, the State Council had set a 7.5% target. Some economists suggested that could be difficult to achieve.

After serving two five-year terms in office, Li has just hosted his final press conference as State Council boss. But the 66 year-old was confronting a very similar set of challenges to those in his inaugural session. Is the growth target too ambitious? Will economic and market reforms continue? And what’s the latest on the policy struggle with those that oppose many of these changes?

China’s economy has grown substantially over the past decade but Beijing’s answers to these questions will help to set the course for an important year for the Communist Party, which is expected to host its five-yearly Congress in the autumn to pick a new crop of leaders, including Li’s successor as premier.

What is China’s newest growth target?

Li presented his annual work report at the Two Sessions, a gathering that bring together several thousand delegates and political advisors every spring. He announced that the government had set a GDP growth target for the year of “around 5.5%”. This is the lowest figure since the authorities first made public such projections in 1994. The target is being phrased in a way that growth below 5% looks unlikely, or at least well below the pace that the government would want to see. The annualised goal was also lower than the 6% threshold set for 2021, although the economy eventually surpassed that with an 8.1% expansion.

In another key objective, China aims to create over 11 million new jobs this year. The same target was set in 2021 and the economy ended up generating more than 12 million (the full employment numbers include nearly 200 million gig workers, of which 13 million are riders for delivery platforms).

As a result, the urban unemployment rate remained at 5.1% and Li’s new target is to keep it “below 5.5%” this year.

Job creation is an important plank in maintaining social stability. Keeping consumer goods prices stable is another priority too. To this end the State Council wants to cap consumer inflation at 3% – again the same maximum as in 2021, although the consumer price index ended up growing just 0.9% over the year.

These targets are set as part of the effort to maintain stable employment levels, meet basic needs and guard against risks, Li said. He also added they’d be in line with meeting the overall goals of the 14th Five-Year Plan, which runs from 2021 to 2025.

Is the growth target still too ambitious?

Li, however, predicted testing times for the economy, warning of the “triple pressures” of shrinking demand, disrupted supply and “weakening expectations”.

Many local governments have already toned down their own expectations for local growth as well. Guangdong, Jiangsu and Shandong – the three biggest provincial economies – have all set growth targets for 2022 at “around 5.5%” too.

China’s GDP topped Rmb114 trillion ($18 trillion) in 2021 and given how much bigger the economy is now 5.5% growth this year would still equate to 10.5% growth a decade ago in terms of the renminbi amount of GDP added, Xiang Dong, deputy director of the State Council Research Office (the policy think tank that helps to draft the premier’s work report), said at an accompanying press conference in Beijing. The target is achievable, he insisted, despite translating into adding nearly Rmb9 trillion of GDP, enough to rank as the world’s 11th biggest economy last year (just behind Canada).

International observers think the growth target is ambitious, however. Both the World Bank and the International Monetary Fund have revised down their own forecasts for 2022, for instance, as they expect slowdowns in both the US and China. There has been some cautionary data: in the fourth quarter China’s economy grew just 4% on the year. Tourist spending over the Chinese New Year holiday in February, was 44% lower than in 2019, the year before the pandemic took hold. Consumer demand has lost momentum, increasing only 1.7% in December from a year earlier.

Some have blamed the slowdown on the so-called ‘zero tolerance’ approach to Covid-19. The strategy involves mandatory testing, strict lockdowns and border controls which continue to weigh on crucial economic activity such as exports and domestic consumption.

The situation isn’t helped by sharp contractions in property sales and land sales, with many cities reporting worse conditions at the beginning of the year than in the final months of 2021. Some cities are reported to be reducing mortgage rates and even downpayment requirements, which could support renewed activity. But for now, the property sector continues to be a drag on growth.

There is also new uncertainty around energy prices and disruption to the global financial system, related to Russia’s invasion of Ukraine. The crisis has put Beijing in an awkward position, given its deepening ties with Moscow, including a raft of financial and energy deals that were signed very recently.

What does China really want at this point?

Work reports by former premiers such as Zhu Rongji and Wen Jiabao have typically included multiple references to objectives like ‘reform’ and ‘growth’. But in recent years the word ‘stability’ has topped the keyword count, the Global Times reported. It was mentioned 76 times by Li in his one-hour keynote at this Two Sessions (up from 64 times last year).

This focus on maintaining stability was also noted by international media outlets including CNN and the Financial Times as Xi prepares to stay on as president – beyond the usual two terms – following China’s senior leadership reshuffle later this year.

Some of the focus flows into national security as well: Li announced a 7.1% increase in the country’s military spending this year, and energy and food security are part of the agenda too, especially after Russia’s invasion of Ukraine. This has pushed up global commodity prices, with oil and wheat futures both hitting their highest levels in more than a decade. That’s also why one of Xi Jinping’s most publicised activities during the Two Sessions was his meeting with advisors from the agriculture and social welfare sectors. Xi also warned that it was a mistake to think that food supply is no longer a pressing concern for China, now a largely industrialised country. “This is important to fill the rice bowl of Chinese people, mainly with Chinese grain,” he said.

Is ‘Likonomics’ now a lost cause?

After Li was endorsed as Chinese premier during the Two Sessions in March 2013, his name was soon being linked with a new agenda called Likonomics. The term was said to signify a step back from economic stimulus as a means for powering growth (such as the Rmb4 trillion package prepared by Li’s predecessor Wen Jiabao to keep the economy going after the 2008 global credit crisis). It also incorporated a new determination to slash debt in the financial sector and a readiness to oversee structural changes in the economy, even at the expense of short-term pain.

Admittedly the term was popularised more in the international media than at home. At the time analysts were also expecting a greater form of collective decisionmaking at the top of Beijing’s power structure. There were even suggestions that Xi Jinping would be the “weakest General Secretary [of the CPC] ever” (see WiC385).

As things turned out, Likonomics dipped out of the spotlight as Xi and his other economic advisors took much more of the initiative, dominating the policy agenda. Li has had a much lower profile than his predecessor as premier and he was sometimes reported in the international press as being marginalised from key decisionmaking (in one instance he was even reported to have pounded his fist on a conference table to make his message heard).

What are Li’s policy choices if the economy dips below the 5.5% growth target this year?

HK01, a Hong Kong-based news portal, thinks that the rumours of Li’s reduced role can be overstated and that he is still a powerful “tactician” in making sure that the central government’s policy directives are being carried out.

As his period in office comes to an end, his challenges have been growing, however. In response, the central bank cut benchmark interest rates in January, although some economists think the People’s Bank of China might have to introduce more loosening in the months ahead. The State Council is also launching a large-scale tax cut and refund programme, to the tune of Rmb2.5 trillion, in a bid to breathe new life into core areas of the economy, especially activity from small and medium-sized enterprises.

Assuming the economy can’t shrug off the lacklustre growth of the fourth quarter last year, the government will still need to roll out more stimulus measures, says the Wall Street Journal, particularly in the latter half of 2022.

Infrastructure investment will need to grow by 6% (as compared to an 0.4% increase in 2021) and related financing should reach Rmb20 trillion this year to underpin 5.5% growth in the wider economy, a recent research paper by the Chinese Academy of Social Sciences has also suggested.

What about the battle with the shadowy ‘vested interests’?

During Wen Jiabao’s final press conference as premier in 2012, he shed light on one of the worst-kept secrets in Chinese politics: that “policies cannot make their way out of Zhongnanhai”, or the walled compound that houses much of the Beijing leadership and their families. The implication was that Wen was struggling to deliver his policy agenda at national level and he made his frustration known more specifically in talking about his efforts to tame runaway home prices, despite repeated interventions.

In another parting shot, he chided some of the largest state-owned enterprises – most notably the banking heavyweights – and claimed that they had been making profits far too easily, even calling for the breakup of some of their monopolies.

After Li took over from Wen, his administration took on some of these ‘unfinished’ tasks. The financing activities of the country’s property developers have come under more onerous regulatory oversight, for instance. Under Xi’s policy banner that “homes are for living in, not speculation”, the real estate sector has been deleveraged to a point that some of the biggest homebuilders have come to the brink of bankruptcy.

Most of the state-owned heavyweights, like the banks and the telecom operators, are still hugely profitable but their earnings growth has slowed to single-digit rates for nearly a decade. Their roles have been reduced to a little more than public utilities – shedding what was left of their former stature as high-growth stocks for investors – while private sector firms in the internet and tech industries took over as the main growth drivers in China’s digital economy’ during Li’s tenure.

One of Li’s most-discussed policy initiatives, aka ‘mixed ownership reform’, has even seen internet giants such as Alibaba and Tencent taking up stakes in some of the large SOEs (such as Sinopec’s retail unit).

Nevertheless, a wide-ranging crackdown on the internet sector since late 2020 (which also brought the cancellation of Ant Group’s IPO and Didi’s delisting plan from the New York stock exchange) has highlighted how the pendulum has swung back against some of these more recent favourites. State-backed enterprises now seem to be back in favour again, with a number of state firms investing in Ant Group’s revamped fintech businesses.

With sustained speculation that real estate giant China Evergrande cannot survive in its current form, SOEs are also likely to be first in the queue to snap up its more valuable assets. Even in the investment market state-backed funds have become an increasingly influential force, Economic Observer reports, in backing some of the country’s most promising start-ups.

Nevertheless Li still see great importance in the private sector’s contribution towards growth targets as he pointed out to journalists in his last NPC ‘meet-the-press’ session this morning. ‘Quality’ growth was still on his mind as he shared a mountaineering metaphor with the assembled media. “If you want to climb a 1,000-metre mountain, 10% is only 100 metres. If you want to go to the top of a 3,000-metre one, it will take 150 metres to go up just 5%. The air pressure is lower with less oxgen as well. So your pace looks slower as you climb but the quality is much more important,” Li emphasised, adding that the Chinese government’s massive tax refund programme is like “supplying oxygen to the mountain climbing” private sector.


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