China Could Boost GDP By 20% If It Shakes Up Economy

Chinese Premier Li Qiang is having a debate with the International Monetary Fund over the direction of Asia’s biggest economy. And the timing couldn’t be better considering how much the world has riding on who’s right.

At a development forum in Beijing over the weekend, China’s No. 2 official offered the glass-half-full version. Li argued efforts are well afoot to generate “high-quality development” and “intensify macro-policy adjustments” in ways that enliven domestic demand. China, he added, is welcoming a “higher level of openness” as it raises its economic game.

At the same event, IMF Managing Director Kristalina Georgieva offered a glass-half-empty take on China’s 2024. From her vantage point, China pushing ahead with vital reforms is still more an “if” than reality.

“China is poised to face a fork in the road — rely on the policies that have worked in the past, or update its policies for a new era of high-quality growth,” Georgieva said.

Georgieva argued that Xi’s economy could boost gross domestic product by 20% over the next 15 years if it accelerates efforts to repair the property sector, increase domestic consumption, improve corporate governance, liberalize regulatory frameworks and devise more dynamic strategies for artificial intelligence and electricity pricing.

“With a comprehensive package of pro-market reforms, China could grow considerably faster than a status quo scenario,” Georgieva said. Doing so, she reckons, would add about $3.5 trillion to GDP, an India-sized output boost.

Written between the lines in bold font are IMF concerns that Li and his boss Xi Jinping are talking a lot more about raising China’s economic game than doing. As deflation intensifies, corporate and household confidence are declining.

At the same time, progress in getting bad assets off property developers’ balance sheets is progressing glacially. So are decisive moves to build more vibrant capital markets and stronger social safety nets.

Nor has Xi’s decade-plus in control made China Inc. more transparent. Rather than learn from Hong Kong’s success, the globe is witnessing the Chinafication of an economy once celebrated as the freest.

As such, the to-do list that Georgieva detailed in Beijing is a long and daunting one.

“Tackling these challenges is essential for a smooth transition to a new era of high-quality growth,” she said. “Our analysis shows that decisive steps to reduce the stock of unfinished housing and giving more space for market-based corrections in the property sector could both accelerate the solution to the current property sector problems and lift up consumer and investor confidence.”

Georgieva went on to say that a “key feature of high-quality growth will need to be higher reliance on domestic consumption. Doing so depends on boosting the spending power of individuals and families. China’s social security system covers more people than any other on the planet. But there is room to expand its reach further and increase benefits—think of strengthening the pension system in a fiscally responsible way.”

Domestic consumption, the IMF stresses, also depends on income growth, which in turn relies on the productivity of capital and labor.

“Reforms such as strengthening the business environment and ensuring a level playing field between private and state-owned enterprises will improve the allocation of capital,” Georgieva said. “Investments in human capital — in education, life-long training and reskilling — and quality health care will deliver higher labor productivity and higher incomes.”

These suggestions are music to the ears of global CEOs in Beijing for a business forum on Monday. Among them: Apple’s Tim Cook, Pfizer’s Albert Bourla and FedEx’s Raj Subramaniam.

There, Jin Zhuanglong, China’s minister of industry and information technology, told CEOs that “we encourage foreign firm’s [Chinese] R&D centers to undertake major research projects.” He added that “we will provide service and safeguards for worldwide scientists, entrepreneurs and investors who come to China to innovate and start businesses.”

Visiting chieftains know better, though. The gulf between China’s promises to open up and level playing fields and the reality on the ground continues to turn off multinational companies.

The most immediate worry, of course, is ensuring that growth remains as close to this year’s 5% target as possible.

Last month, the People’s Bank of China cut its five-year loan prime rate by 25 basis points to 3.95%, the first such move since May 2023. Odds are, more such moves are coming.

“With inflation low and economic momentum still tepid in early 2024, we believe that monetary policy will remain accommodative in China moving forward,” says Lynn Song, economist at ING Bank.

Yet bold reforms of the kind IMF chief Georgieva spelled out are far more important to increasing the quality of Chinese growth. The sooner Xi and Li see that they’re carried out, the better China will perform in the years ahead.