China rubber-stamps more of Xi’s economic delusions

This week in Beijing, the Chinese Communist Party-controlled National People’s Congress, a rubber-stamp legislature, set out President Xi Jinping’s policy goals for 2024. Premier Li Qiang announced that China would set a GDP growth target of around 5%.

China wants technological supremacy over the United States and other nations and proposes to increase research and development spending by 10%. China also wants economic self-sufficiency and is actively discouraging its population from buying foreign-branded goods and services. A stated goal of the National People’s Congress is to increase exports in order to achieve the 5% GDP growth target.

Elites also reiterated goals around domestic security, national security, and the reintegration of Taiwan into the People’s Republic of China. Notably, China did not say that it would achieve such reintegration peacefully. It will increase spending on its military by a stated figure of 7% but will more likely spend double that after hidden funding is accounted for. By contrast, U.S. President Joe Biden proposes to increase the American defense budget by only 1%. That is a cut in inflation-adjusted spending.

Still, nonpartisan experts on China are skeptical that the 5% growth rate can be achieved. Critics point especially to the lack of direct support for household consumption. Critics explain that China cannot continue to rely on capital investment. Appropriate policy would encourage Chinese households to consume more, but households save because the social safety net is inadequate. Instead of subsidizing increased household consumption, policy is directed at increasing supply in the manufacturing sector.  Subsidies for manufacturing exceed support for household consumption by a ratio of 10:1.

China is focusing on the supply side when the real problem is inadequate domestic demand. China will try to export excess production. That inevitably will lead to increased international trade tensions. Under the 2024 economic plan, China will wrongly continue to focus economic support on state-owned enterprises, which are less efficient and less entrepreneurial than the Chinese private sector.

It is also stated policy that Chinese banks should provide more capital to the already bloated state-owned enterprises sector. Each year, state-owned enterprises increase their share of the economy at the expense of the private sector. That makes the 5% growth target even more unrealistic.

The policies set forth at the National People’s Congress thus pose challenges for the U.S. The U.S. must increase tariffs when China attempts to dump excess production into the U.S. economy. The U.S. must respond aggressively when China tries to avoid tariffs by shipping excess production through third countries.

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The “Buy China” policy is already harming Apple, for example. Sales of Apple’s smartphones in China are down 24%. In response, the U.S. should make it more difficult for Shein and other low-quality Chinese apparel companies that use slave labor to sell into the U.S. market. Eliminate the $800 tariff exemption. Most importantly, the U.S. must maintain technological supremacy over China.

The U.S. tax code should allow for the expensing of research and development costs and capital investment. Most fundamentally, the federal deficit should be reduced. High federal deficits raise interest rates and crowd out R&D and total capital investment.

James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.

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