The biggest bombshell from the National People’s Congress? In my view, China’s announcement it was “vigorously” shifting its focus from investment-led to consumption-led growth. This is big. And it’s bold. It’s like the All Blacks abandoning rugby and switching to soccer. Or Arsenal switching to cricket. Or the New York Yankees switching to basketball. I mean, sure, it’s possible but not at all easy.
Let me explain. For the past 20 years, China’s growth model has been resolutely and overwhelmingly investment led. In many respects they wrote the playbook. They are the masters at super-charging both domestic and externally led growth via typically government-supported, state-owned enterprises (SOEs). In the world, there’s no one better.
From government bureaucracy, the SOEs, to the regulatory architecture, the structure of taxation, and the state-owned banks acting as the government’s “policy arm”, China’s investment-led growth model is embedded in the country’s DNA. As of 4Q 2024, investment’s share of government spending was close to a record high. And now – according to Premier Li Qiang – it needs to change.
Almost certainly they will drop the ball. Just as the All Blacks, Arsenal, and the Yankees would lose their first few games in their struggle to transition, so we can expect mishaps, fouls, and own-goals. But as the audience changes, so must the offering. Growing trade tensions with the US and EU, and the need to reduce its reliance on external demand, require a root and branch reform. And it will take time.
Adjustment
Unfortunately, China doesn’t have time; rather, it’s up against the clock. On 4th March the US government raised tariffs on China by a further 20%, complicating (the reaching of) an already ambitious growth target of “around 5%” for 2025. Exporting to a globalized world was easy; doing the same into a rapidly de-globalizing world is hard; hence the substitution in growth drivers to domestic consumption.
See also: China’s inflation declines below zero for first time in year
There’s a certain irony in the respective ambitions of the US and China. For decades, the former over-consumed and under-produced; the latter over-produced and under-consumed. Now, under Presidents Trump and Xi, they want to swap. The good news is, each has a potentially vast consumer base from which to engineer their adjustment.
Of course, the two countries have vastly different starting points. China is aiming to transition to a consumption-driven economy, but its consumption accounts for just 35-40% of its 2024 GDP—far below the US’s 65-70%. Thus, while Premier Li exhorts officials to “make domestic demand the main engine and anchor of economic growth”, the reality is, the adjustment will take decades to achieve. Still, as the saying goes, a journey of a thousand miles begins with a single step.
What pivot?
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As far as the NPC is concerned, however, I would describe China’s first step as timid. Perhaps a dipped toe in the water rather than a great leap forward. For example, reviewing the various spending goals, fiscal ambitions, and stimulus targets announced at the NPC, you’d have a hard job identifying a “pivot to consumption”.
Thus, among other things, the fiscal deficit target was raised from 3% to 4% of GDP; the special bond issuance quota was raised some 80% from RMB 1 trillion to RMB 1.8 trillion; and the local government special bond issuance quota was increased from RMB 3.9 trillion to RMB 4.4 trillion.
But the hard truth is the economic outlook for 2025 remains difficult. The authorities might be acknowledging this reality to a degree. In addition to lowering the annual inflation goal from 3% to 2%, the government appears to be implicitly assuming the same growth rate for both nominal and real GDP, which implies expectations of 0% inflation. Policymakers keen on fighting deflation would do more to meet existing goals instead of lowering the goals themselves.
Meanwhile, core government bond yields – which resolutely and unremittingly head south – suggest markets see deflation (and sub-par growth) lingering for the foreseeable future.
Influencer not bazooka
The problem with consumption-led growth is that – unlike investment-led growth – you cannot turn it on demand. It’s reasonably easy for governments to construct buildings or build bridges and roads; it’s substantially harder to tempt animal spirits to spend and consume, especially if they are sitting on negative equity, fear for their jobs, and lack confidence in the economy. In a consumption-led world, it’s less bazooka and more influencer.
Which is why Jack is back. To inspire or cajole Mrs Zhang to ease back on the savings and instead open her purse strings, she needs confidence. She needs to know she can spend with abandon and without the social push-back that accompanied – for example – common prosperity. Mr. Ma’s recent, storied rehabilitation is designed – among other things – to do just that.
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And getting it right can pay handsomely. For example, in the “go-go” year of 2018 – two years before Ma’s fall from grace – consumption spending contributed 4.5% to overall real GDP growth; by 2024 this metric had fallen by more than half to just 2.2%. Not surprisingly, over the same period, anxious households’ bank deposits more than doubled to RMB 157 trillion even in the face of falling deposit rates. That needs to change.
Strategic weight
To be fair, the market is doing its best to boost sentiment and unleash animal spirits. In a blockbuster start to the year, the MSCI China Index has posted its fourth-best (year-to-date) start since 1993; and the Hang Seng Index, its best start since 1983.
Whether or not this momentum can continue after the buying eases from onshore mutual funds and the (so-called) national team is less certain. I’d suggest that after such an extraordinarily short and sharp rally, the market is pretty much “priced for perfection” – potentially vulnerable to policy disappointment and/or external shocks on the trade front. Only time will tell.
Meanwhile, hopes are high that if not a “magic bullet” then at least a workable solution can be found for China’s embattled property sector. The government has been making positive noises around the importance of financial assets and real estate assets. And official support for the property sector – after spending several years in the policy wilderness – is important.
But as we discovered during Japan’s three lost decades, it takes more than verbal intervention to de-lever a critically over-leveraged housing market. Possibly house prices can stabilize during 2025 – and there’s some “green shoot” evidence that is happening – but I fear price appreciation is many years away. Until then the sector will remain a drag on growth.
China’s consumption-led ambitions, however bold, remain nascent. Jack Ma’s return signals intent, yet entrenched savings habits and a faltering property sector resist swift change. With tariffs rising and time short, China’s 5% growth target remains vulnerable. We retain and maintain our recommended strategic weight toward China equity risk.
John Woods is chief investment officer, Asia, Lombard Odier
