China needs a bigger wave of stimulus to boost spending and exports

To achieve its economic growth target, Beijing will have to lift consumption and hi-tech exports
China’s unique circumstances mean it requires more stimulus than previously, including the 4 trillion yuan used to combat the 2008 global financial crisis

Christopher Tang

Published: 4:30pm, 17 Mar 2024

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Premier Li Qiang has declared an ambitious economic target of around 5 per cent growth for China this year. While this presents a challenge, it is not insurmountable.

As the US devises strategies to lessen its dependence on China, Beijing must increase its self-reliance. At this critical juncture, the Chinese government should implement a substantial stimulus plan to boost consumption, fortify hi-tech production and augment exports.

In the US, with Nikki Haley’s withdrawal from the race to be the Republican presidential nominee, Donald Trump is set for a rematch with President Joe Biden in the November election. Whatever the outcome of what is expected to be a close fight, both Biden and Trump see China as an economic threat to the US.

As president, Trump initiated a trade war in 2018 by imposing a 25 per cent tariff on a broad range of imports from China. In 2019, he banned Huawei Technologies from selling telecoms equipment in the US, calling it a security threat. Last month, he said he would impose tariffs of 60 per cent or higher on Chinese goods if elected.

Biden asserts his divergence from Trump, but his stance towards China mirrors that of his predecessor. He has kept Trump’s tariffs on China that he once vowed to remove when in office. He also banned US companies from selling advanced microchips and the equipment used to make them to Chinese firms, a move aimed at impeding China’s progress in the semiconductor industry.

Last month, Biden instructed the Commerce Department to investigate the risk of cyberattacks from Chinese smart electric vehicles (EVs). This investigation, prompted by potential national security threats, could lead to a ban on Chinese EVs.

As the US diversifies its supply base through “friendshoring” in Vietnam and India, “nearshoring” in Mexico, and “reshoring”, its Chinese imports dropped by 20 per cent last year, according to official US data.

In addition to the trade downturn with the US, China’s post-pandemic economic recovery has been slower than anticipated. But, despite these obstacles, Beijing has the resources to stimulate growth.

China should not only foster foreign and domestic investments. It should also focus on other key components of gross domestic product growth, by increasing government investment and spending, stimulating consumption and expanding exports.

02:40

Chinese Premier Li Qiang delivers his first work report amid concerns about state of the economy

First, China should boldly augment its fiscal stimulus by issuing more bonds. It has plans to issue 1 trillion yuan (US$139 billion) worth of ultra-long special treasury bonds this year, and more in coming years. This is the fourth such initiative in 26 years but many experts believe it is insufficient stimulation for the economy.

China’s unique circumstances mean it requires more stimulus than previously, such as the 4 trillion yuan used to combat the 2008 global financial crisis, when overseas orders plummeted. At that time, China devised a plan to support manufacturers such as Haier and Hisense, including subsidising purchases of home appliances and mobile phones, which stimulated consumption and helped maintain growth.

China’s current economic challenge is more localised. Given that many Chinese consumers already own home appliances, mobile phones and cars, Beijing needs to encourage them to upgrade to energy-saving appliances, electric vehicles and smartphones manufactured by Chinese companies.

Why I believe stimulating consumption is still China’s best bet

To do this, the government should invest more in subsidies. This would stimulate consumption and prompt Chinese manufacturers to increase production, boosting the economy and creating more jobs.

The time is ripe for a substantial subsidy programme. Chinese households accumulated a record US$2.6 trillion in bank deposits in 2022 and there has been an uptick in the consumer confidence index this year. All the signs suggest a massive stimulus plan can encourage Chinese consumers to increase their spending.

This would, in turn, boost China’s manufacturing purchasing managers’ index (PMI), which has mostly been hovering below 50 since the end of various Covid-19 policies in January last year. (A PMI reading above 50 indicates an expansion in production activity, while a reading below that signifies a contraction.)

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What is the purchasing managers' index (PMI)?

Second, China is well positioned to expand its exports to countries beyond the US. For all the evolving dynamics of global supply chains, China has remained the world’s factory. It would be prudent for Beijing to issue bonds to strengthen the manufacturing and domestic technology sectors to sustain global competitiveness.

The remarkable success of Shein and Temu in the US, Britain and the European Union exemplifies the efficiency of China’s supply chain.

China’s supply chains are difficult to replicate, with India, Vietnam and Mexico continuing to depend on Chinese-made components to manufacture their products for the US market. Additionally, China dominates the mobile phone markets in many developing countries.

For instance, Chinese brands such as Xiaomi, Vivo and Oppo command over 64 per cent of India’s smartphone market. Last year, Transsion alone captured nearly half of Africa’s smartphone market.

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As Chinese smartphones become ubiquitous in these developing countries, exporting EVs to these markets is a logical next step. Indeed, BYD, which surpassed Tesla to become the leading EV maker by sales in the last quarter of 2023, has penetrated Southeast Asian markets, including Indonesia, Thailand, Singapore, Malaysia and Vietnam.

The Chinese carmaker is also building an EV plant in Thailand that is set to start production this year. To cater to the Mexican and Brazilian markets, BYD last month announced plans to set up a factory in Mexico.

While many are sceptical about China’s economic future, the resilience of its people should not be underestimated.

Christopher Tang is a distinguished professor at the UCLA Anderson School of Management