By George Lei, Bloomberg markets live reporter and strategist
US Treasury Secretary Janet Yellen implored Beijing’s top leaders during her four-day visit to refrain from boosting the country’s already vast manufacturing capacity and to focus on lifting domestic demand instead.
That push, however, is in stark contrast to the priorities of President Xi Jinping, whose “new productive forces” slogan is now dominating the economic policy discourse. His push suggests the country’s expansion of its production capacity will likely persist and contribute to increasing tensions with the nation’s major trading partners.
While its not entirely clear how Xi’s policy will play out on the ground, equity investors have already picked winners since the phrase was listed as the government’s top task in early March. Market reactions seem to imply that Beijing will double down on state spending to strengthen China’s transition toward high-tech, value-added production and advanced manufacturing. There is also a perception that “Made in China 2025” - a government plan to groom 10 globally competitive industries, and one that drew the ire of former President Trump - is making a comeback.
The push for greater investments in manufacturing will likely reinforce China’s role as the world’s factory and fuel already-tense trade relationships with the US and other major economies, both in the developed and developing worlds. Over the past few months, the European Union, for one, has pushed back hard against a glut of Chinese products flooding the bloc’s market, including EVs, semi-conductors and solar and wind equipment. Frictions have also been on the rise with countries including Chile, Turkey and India in recent years.
Beijing has also attempted to reorient its economy toward one driven by consumption, but it’s had little success. Back in 2020, Xi advocated “dual circulation,” a catchphrase calling for a greater push on reforms to build an economy with stronger local catalysts and a pivot away from export-led growth. That vision never materialized and the term has subsequently fallen into disuse, like other popular slogans during the pandemic era such as curbing “disorderly capital.”
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— Michael Pettis (@michaelxpettis) April 5, 2024
Increased investment in manufacturing, in other words, is among the few things that will allow China to reach the 5% growth target. Without that, either it needs a major fiscal boost to consumption (something Beijing decries as "welfarism"), or it has to accept lower growth.
Tasked with delivering 5% growth yet unable to either engineer a major housing stimulus or lend a strong helping hand to consumers, policymakers can only resort to increased manufacturing investments, Michael Pettis, professor of finance at Peking University and senior associate at Carnegie Endowment for International Peace, wrote in a tweet on Friday.
With Xi’s motto “housing is for living in, not for speculation” surfacing from time to time in policy discourse and calls for direct cash transfer to consumers falling on deaf ears, re-balancing toward a consumer-driven economy looks like a tall order.
As production exceeds consumption, Pettis says “trade conflict is only likely to get worse.” That probably won’t change no matter who wins the White House in November.
