As US growth remains sluggish, China is rebounding
On Sunday, China’s Premier Li Keqiang announced at the National People’s Congress that China has set a 5% GDP growth target for 2023.
Chinese GDP figures should always be taken with a pinch of salt. Indeed, Keqiang himself once said that the figure was “man-made” and unreliable. He instead suggested tracking other metrics such as railway cargo volume, electricity consumption, and loans disbursed by banks. China watchers have since come to refer to this as the ‘Li Keqiang index’.
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Yet when we look at alternative metrics, they do appear to track China’s official GDP figures. And since Chinese GDP figures usually clock in close to the target set by the Government, it is safe to say that Keqiang’s promise to deliver around 5% GDP growth in 2023 is reasonable.
What is interesting about this announcement is that it is made at the same time as many developed economies slip into stagnation or even recession. This is striking because, for the past 20 years, the Chinese economy has ebbed and flowed with the rest of the world. When the United States and Europe were growing, so too was China; when they were slowing, China followed accordingly.
Yet the forecasts for the developed economies in 2023 are dismal. Where the United States is expected to grow at only 0.1%, Europe isn’t much better (0.7%). The fact that China is expecting robust growth implies that its economy is decoupling from the developed economies.
We could now be entering a great divergence between two of the world’s biggest economies. If the developed world sees five years of sluggish growth — which is perfectly possible — while the Chinese economy continues to grow at its forecast pace, this could have profound implications for the world economy as a whole. It may mean that we are moving into a new world where US supremacy is no more — and where the much vaunted Chinese takeover as the world’s leading economy is finally coming to fruition.
It is also interesting to note that China announced at the Congress that it would increase its military budget by over 7%. Some commentators pointed out that this was higher than its GDP target, but this is an error. China’s GDP targets inflation-adjusted output; its nominal GDP target is around 8%. Nevertheless, this is a substantial increase in China’s military budget.
In part, this likely indicates increased security concerns around Taiwan, but it’s also a reflection of the Chinese Government’s attempts to rebalance its economy away from wasteful investment spending. Increasing military spending means that less money needs to be channelled into property and infrastructure investments, some of which have dubious market value. It is a novel move from a country which is taking advantage of the coming recession in the West to forge its own economic path.