The Chinese Vice-Premiers Speech At Davos 2023: A Comprehensive Investment Analysis
By Chris Devonshire-Ellis
Davos 2023 is taking place amongst an increasingly insecure world with recessions imminent or expected. Regional conflicts and a global struggle for supremacy are unfolding as a scramble for energy resources, and climate warming problems appear at increasingly opposite ends of the political spectrum. China’s geopolitical position, as the world’s largest trading nation, the second largest global economy and with the world’s second largest population will have a huge impact on how the year will be shaped. At Davos 2023, China’s Vice-Premier, Liu He, had this to say as concerns Beijing’s perspective of Chinese and global development during the coming year and will be of great interest to academics, geopoliticians and investors alike. My own comments follow where appropriate.
Liu: Good morning! Let me begin by thanking Dr. Schwab for inviting me to Davos again. The last time I came here was 2018. Over the past five years, we have experienced all kinds of unexpected events, and witnessed profound changes in the world’s political and economic landscape. Therefore, the theme of this year’s Annual Meeting, “Cooperation in a Fragmented World”, cannot be more relevant.
Mutual understanding is an important prerequisite for cooperation. Online communication, no matter how frequent or how technologically advanced, is no substitute for in-person meetings. I had quite a number of very warm meetings with some old friends these two days. Hopefully, at this face-to-face meeting, I can help you understand the Chinese economy better.
In 2022, China completed its major political agenda. We held the 20th National Congress of the Communist Party of China (CPC) and elected the new central leadership with President Xi Jinping at its core. We drew up an ambitious blueprint for advancing Chinese modernization in the coming five years and beyond.
CDE: When Beijing mentions ‘with Xi Jinping at the core’ they do not mean Xi makes all the decisions himself. In fact, the CPC is an elected body of 2,300 members who are divided into a variety of policy groups. Their consensus in decision-making of the country’s issues are supported by the entire Chinese government apparatus numbering many more thousands of individuals, within research bodies such as the NDRC, overseas diplomatic missions, universities and other research institutes, the military, health and business groups as well as numerous other think-tanks. A collective apparatus then sends its findings to the politburo where these are further debated and discussed. Xi’s position, while active within this, is as a figurehead, announcing and being seen to carry out the remit of the CPC. Western media often portrays Xi as an autocrat: this is a misconception.
Liu: Last month, we held the annual Central Economic Work Conference to make plans for 2023 in line with the deployment of the 20th CPC National Congress. In 2022, China’s growth was 3%. And we managed to keep jobs and prices stable. Urban surveyed unemployment rate was 5.6%, CPI was 2%, and our current account surplus was slightly above 2% of GDP.
In 2023, we will continue to try to make progress while maintaining stability; and follow a proactive fiscal policy and a prudent monetary policy. We will strive to maintain reasonable economic growth; and keep prices and jobs stable. More focus will be placed on expanding domestic demand, keeping supply chains stable, supporting the private sector, reforming the state-owned enterprises (SOEs), attracting foreign investment, and preventing economic and financial risks.
CDE: It is worth expanding on Liu’s comments here. Western media in particular took aim at China’s ‘lowest level of growth in many years.’ However, when properly examined, other, more encouraging patterns begin to emerge. Within that overall 3% growth, the value added of the high-tech manufacturing and equipment manufacturing went up by 7.4% and 5.6% respectively, indicating that on the industrial level, Chinese manufacturing and capacity continues to move up the value chain. Meanwhile, the production of new energy vehicles, mobile communication base stations, and industrial control computers and systems grew by 97.5%, 16.3%, and 15% respectively.
In the services sector, the value added of the information transmission, software, and information technology services and that of financial services grew by 9.1%, and 5.6% in 2022, while business revenues of information transmission, software and information technology services, of scientific research and technology services, and of health and social services in 11M 2022 went up by 8.3%, 8.3% and 8.1% respectively. These figures are indicative of an economy in transition rather than in decline.
Liu: If we work hard enough, we are confident that growth will most likely return to its normal trend, and the Chinese economy will see a significant improvement in 2023. A noticeable increase of imports, more investment by companies, and consumption returning back to normal can be expected.
CDE: China has been actively encouraging foreign exports to China – again news that has tended to be understated by global media. In fact, the total value of Chinese imports and exports of goods was RMB 42,067.8 billion (US$6,215.6 billion), an increase of 7.7% over 2021, with imports up 4.3%.
This should not be a surprise. China announced at the 2022 CPC Congress that it planned to increase the number of middle class Chinese from the current level of about 400 million to 900 million by 2035, effectively more than doubling it. The CPCs burden, if one can look at it this way, is that as a one-party State, it must continue to keep the Chinese people happy, or social unrest will follow. That is bad news if there is no opposition party to pin the blame on and divert negativity. For this reason, Beijing has introduced a series of measures, including contracting the so-called ‘negative-list’ – and expanding the types of products that can be imported into China via the ‘encouraged list‘, while at the same time reducing tariffs in many cases and encouraging consumer spending. That should signal an encouraging 2023 boom in Chinese domestic consumption and especially as from H2 this year the country should finally begin emerging from the market depressing impacts of Covid.
Liu: Over the past ten years, China’s GDP grew from 54 trillion to 121 trillion yuan; (US$17.881 billion) average life expectancy rose from 74.8 to 78.2 years; while our contribution to global growth reached around 36%. There are five things that we always bear in mind in making such achievements.
First, we must always take economic development as the primary and central task. Under the new circumstances, guided by the philosophy of innovative, coordinated, green, open, and shared development, high-quality economic development must always be our goal.
Second, we must always make establishing a socialist market economy the direction of our reform. We must let the market play a decisive role in resources allocation, let the government play a better role. (Some people say China will go for the planned economy. That’s by no means possible.) We will deepen SOE reform, support the private sector, and promote fair competition, anti-monopoly and entrepreneurship.
Third, we must always promote all-round opening-up. Opening-up, as a basic state policy, is a catalyst of reform and development, and a key driver of economic progress in China. China’s door to the outside will only open wider.
Fourth, we must always uphold the rule of law. We must protect property rights and IPRs in accordance with the law. We must create a world-class and market-oriented business environment underpinned by a sound legal framework. Both government and market activities must stay within the confines of law.
Fifth, we must pursue innovation-driven development. We must promote innovation and education, grow human capital, foster a sound interaction of finance, technology and industry, and boost productivity.
The above five points are the important experience we have learned and gained since China started its reform and opening-up. We must stick to them and never waver in our commitment.
CDE: Points 1-3 are all in favour of foreign investment, while China has been consistent as regards these messages and in enacting its reforms. In terms of rule of law, in 2022, a Chinese court recognised an overseas commercial judgement for the first time (based on the principle of reciprocity), while the proportion of patentees who have encountered patent infringement is at a historically low level. As can be seen in my comments earlier, China is moving rapidly towards an innovation-driven commercial base and has specifically targeted finance, tech, and ‘industry’ while committing to greater productivity. That latter means more robotics, whereas in terms of financial services, a soon-to-be-resurgent Hong Kong is being repositioned and will start to boom again from 2024-25 as a result of the various Wealth-Connect schemes it has with the Chinese mainland. Hong Kong’s path to recovery will be slow, but it is starting to climb up from the worst.
Liu: Let me also briefly touch upon three issues about the Chinese economy you might be interested in: first, where we are in resolving financial risks, those in the real estate sector in particular; second, our thinking on the dual circulation; third, the rationale behind China’s goal of common prosperity.
The financial risks that emerged in China over the past five years are a result of multiple factors, including macroeconomic downturn, loose financial supervision, imprudent business expansion, and insider control.
We fought a tough battle to address these risks. We dealt with conglomerates as well as small and medium-sized financial institutions of high risks, disposed of distressed assets, curbed shadow banking activities, and handled unusual volatility in the capital market.
Thanks to these efforts, we have managed to maintain overall financial stability and prevented systemic risks. We are drafting the Financial Stability Law right now, which is expected to provide legal safeguards for defusing risks and maintaining financial stability as we go forward.
The real estate sector is still a pillar for China’s economy. It accounts for nearly 40% of bank lending, 50% of overall local government fiscal resources, and 60% of urban household assets. From the second half of 2021, China experienced a rapid decline in property prices and home sales. Many property developers suffered from liquidity shortage and deteriorating balance sheet. The risks of a handful of leading property developers are particularly noticeable.
If not handled properly, risks in the housing sector are likely to trigger systemic risks. That is why prompt steps must be taken to address them. That said, however, we should also prevent possible moral hazards while doing so. Here is what we have done.
First, we have stabilized expectations by honoring contracts and protecting property rights. For the 2,600-plus pre-sold but unfinished housing projects that concern 1.88 million people across the country, we have made ensuring their delivery a priority, and this helped prevent panic in the market.
Second, we have conducted massive “blood transfusion” to the real estate sector. The liquidity situation of real estate companies has been greatly enhanced by way of fresh bank lending, bond issuance guarantee, and equity financing.
Third, we have helped the real estate sector with “blood formation”. We have relaxed restrictions that were once introduced to address the overheating in the property market. Such adjustment has expanded effective demand and enabled property developers to generate revenue.
Thanks to these efforts, the supply and demand in the market has seen noticeable improvement. Looking ahead, China’s urbanization is still on a fast track, and the enormous potential demand generated in this process will provide a strong underpinning for the development of the real estate sector.
CDE: China is continuing its drive towards urbanisation. In 2022, its share of the urban population in the total population (urbanization rate) was 65.22%, or 50 percentage points higher than that at the end of 2021.
Liu: Right now, China is stepping up efforts to foster a new development paradigm with domestic circulation as the mainstay and domestic and international circulations reinforcing each other. The focus of domestic circulation is on expanding internal demand, promoting industrial upgrade, developing a consumption-led growth model, and re-balancing the economy. (This is a logic reflecting international consensus since 2008.)
However, for domestic circulation to function well, it must rely on international division of labor and cooperation, as well as more foreign trade and investment. Therefore, the new development paradigm of dual-circulation is to be pursued in an open economy.
CDE: Chinese politicians and their assistants always seem to have a favorite new English word to use each year as they mull through their Chinese-English Thesaurus for speech-writing inspirations. In 2023, expect to read copious volumes of ‘paradigm’.
In terms of the ‘Dual-Circulation Strategy’, this is an economic model that seeks to spur China’s domestic demand on one hand and simultaneously develop conditions to facilitate foreign investment and boost production for exports on the other. Thus, the two-pronged strategy refers to the parallel emphasis on an ‘internal circulation’ and an ‘international circulation’ and a shift towards becoming a demand and innovation-driven economy. While on its own merit, the DCS is not an inwards-looking strategy, the focus on tapping into China’s internal consumption patterns and domestic markets aims to buffer the impact of global economic headwinds and unpredictable external events on China’s economic and financial stability. The strategy is also, in more simpler terms, a culmination of China’s intentions to become more self-reliant as well as increase its export market exposure. More here. Foreign investors interested in China should take note that this is a key part of China’s development strategy and is actively encouraged by all Government policies. The ‘spurring of China’s domestic demand’ is of course excellent news for global exporters looking to sell to a Chinese middle class consumer base planned to double within the next decade.
Liu: China’s national reality dictates that opening up to the world is a must, not an expediency. We must open up wider and make it work better. We oppose unilateralism and protectionism, and look forward to strengthening international cooperation with all countries for world economic stability and development, and the promotion of economic re-globalization.
Now that China has completed the mission of building a moderately prosperous society in all respects, we have come up with a new social development goal of achieving common prosperity, a historical mission that will help us ensure lasting stability. It is a long-term task that requires an incremental and gradual approach. It is not something to be achieved overnight.
Common prosperity, as we see it, is aimed at preventing polarization. It can only be attained through common development and the hard work of every Chinese. Common prosperity is by no means a synonym of egalitarianism or welfarism. As China grows, all Chinese people will be better off, but that doesn’t mean their incomes and level of prosperity have to be the same. (That is to say, there will be equal opportunities, but no guarantee of equal outcomes)
Entrepreneurship is a key factor for wealth creation of a society. Therefore, entrepreneurs, both Chinese and foreign, will play an important role as the engine driving China’s historical pursuit of common prosperity. If wealth doesn’t grow, common prosperity will become a river without source or a tree without roots.
CDE: There is mild reference to the ‘Unipolar’ vs. ‘Multipolar’ global struggle here, with the United States and its Western allies on the unipolar path, and China, notably alongside India, Russia and much of the emerging world on the other. Liu’s speech though mainly concentrated on China as an opportunity rather than the current global struggles.
Liu: The theme of this meeting, “Cooperation in a Fragmented World”, is highly relevant. As President Xi Jinping noted, changes of our world, of our times, and of history are unfolding in front of us in unprecedented ways. The world has once again come at a historical crossroad, and its future hinges on the choices we make. As for how to advance international cooperation, I would like to share with you the following three observations.
First, we need to uphold the right principles and maintain the effective international economic order. Under the new circumstances, the traditional way of thinking cannot provide the solution. That is why we have to abandon the cold war mentality, try to understand the nature of things from the perspective of material duality, endeavor to build a community with a shared future for mankind, and join hands to respond to global challenges. We believe that an equitable international economic order must be preserved by all. Equitable division of labor, encouragement of competition, anti-monopoly, protection of property rights and IPRs, promoting entrepreneurship and free flow of production factors, fair distribution, a strong social safety net, and ensuring macroeconomic stability are the well-proven economic principles that are still relevant today. Government has a key role to play on major issues, despite temporary resistance and some setbacks, we must have the courage to uphold truth and law of economics and address complex issues pragmatically with plain and simple solutions.
CDE: The key word that Liu used here is ‘equitable’. The use of this word in the context of his mentioning an ‘international economic order must be preserved by all’ therefore does not mean that China does not seek change. It does. This indicates that a number of highly significant global struggles can be expected to emerge in terms of global influence. China and its allies are pushing for reforms at the United Nations, the World Trade Organisation, the World Bank, and many other global institutions that are perceived to have become structured in a manner sympathetic to the United States and its allies rather than emerging economies. This is now being challenged. Davos itself has been downgraded – the key global issue today is what to do about Russia – yet it was not invited. Institutions are being diminished. The shift is geopolitics is occurring, what remains to be seen is whether one group of nations continues to keep its institutions while another grouping emerges with new ones – or whether there is room for compromise. If not, a divided world order will likely emerge – heightening, not diminishing the potential for conflict. Key to this are planned developments with the growth of BRICS, potential new regional blocs, and the emergence of new digital, asset-backed ‘tokens’ to replace the SWIFT banking network and the US dollar – increasing being seen as a risky currency to be using when potentially facing difficulties with Washington – as is now being built into many economies backup plans. The once US-friendly Saudi Arabia is now reported to be dropping the US Dollar as a preferred currency and intending to use the Chinese Yuan as just one example. India is another. These developments will take time to take shape – but Liu is correct in implying that change is coming.
Liu: Second, we need to strengthen international macro policy coordination and strike a good balance between inflation and growth. To tame inflation, some countries have chosen the policy that will likely result in the hike-recession-recovery loop. But it is important to note that inflation this time around is driven by multiple factors. Apart from the demand side, supply-side measures are also needed to repair the supply chains and preserve energy and food security.
A joint response to this challenge requires international cooperation and maintenance of peace. We call for more attention to the negative spill-over effect of major countries’ rate hikes on the emerging markets and developing countries so as not to add to more debt or financial risks. We stand ready to work with all parties to find solutions to the debt issues of some developing countries.
CDE: There is mild criticism of the Fed here, which is increasingly acting in shorter-term US interests than medium-term global problems. That may be deliberate, in order to ‘encourage’ China to take more risk. Alternatively it could indicate a US decline. Time will tell. Much has been written about Chinese debt traps in its dealing along the Belt and Road Initiative in particular, and will continue to be by the ill-informed or scandal-mongers, however a number of Western academic papers last year, including the Lowy Institute essentially de-bunked that. That’s not to say that some loans have gone awry and require refinancing. That’s not unusual (ask your local bank manager) and is no real surprise when projects designed to develop cash-flow revenues to help repay loans were delayed by Covid. By and large China though has been sympathetic to its creditors, and the level of stressed debt given the huge amounts Beijing has lent remains well within financial lending norms.
Liu: Third, we need a global response to climate change. Most countries in the world are keenly aware of the urgency of climate governance and the need for common actions. COVID-19 has revealed to us a possible connection between climate change and public health crisis. This is an area where effective international cooperation is needed.
China will honor its commitments to the international community, push for global cooperation on climate change, and work with other countries to tackle the serious challenges posed by climate change, and build a community with a shared future for mankind.
CDE: China was very active in 2022 as concerns greening industry sectors and announcing new regulatory structures and incentives to promote the use of green technologies and addressing climate change. It has to: China has a coastline of some 14,500km and numerous key cities lie in low-lying areas, including Shenzhen, Xiamen, Ningbo, Shanghai, and Dalian among many others. We discussed China’s 2022 green and low carbon plan, and the relevance to foreign investors here and discussed China’s new green compliance laws here.
Liu: How to strengthen cooperation in a fragmented world is a real problem we all face. We must dig deep into the causes of fragmentation, promote positive-sum games, identify the possible converging areas of cooperation, and explore the mechanisms for doing so. We must work together to firmly safeguard world peace. We should be grateful that this year’s Davos Forum presents us with an opportunity to do just that. I wish the Forum a full success, and hopefully, it can help us strengthen cooperation and preserve peace in a fragmented world.
Liu He is a heavyweight politician and an economist – he studied the subject at China’s Remin University and also has a Master’s from Harvard. He is a former member of the Politburo of the Chinese Communist Party and one of the Vice Premiers (along with Han Zheng, Sun Chunlan, and Hu Chunhua) of China. Liu is also a Director of the Central Financial and Economic Affairs Commission, was named vice-premier on 19 March 2018 and is heading the China Financial Stability and Development Committee. In short – there is no-one better placed than Liu to discuss the 2023 direction of China’s economy. Investors interested in the China market should take note.
Chris Devonshire-Ellis is the Chairman of Dezan Shira & Associates The firm advises foreign investors in China and has done since 1992.