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China's plan to stimulate growth: a new motto for factory construction

by SuperiorInvest

From the top of government, China is heavily promoting a plan to fix the country's stagnating economy and offset the damage of a decades-long housing bubble.

The program has a new slogan, presented mainly by Xi Jinping, the country's top leader, as “new and quality productive forces.”

But it has features that are familiar from China's economic playbook: the idea is to stimulate innovation and growth through massive investments in manufacturing, particularly in high technology and clean energy, as well as robust spending on research and development. And there have been few concrete provisions on how the government hopes to persuade Chinese households to reverse a prolonged slowdown in spending.

Premier Li Qiang, the country's No. 2 official, laid out the plan Sunday in a speech to chief executives from around the world, who had gathered in Beijing for the country's annual China Development Forum. “We will accelerate the development of new quality productive forces,” he said at the forum's opening ceremony.

Started in 2000, the China Development Forum is designed to explain to corporate leaders the economic plan presented each year by the prime minister on March 5.

In previous years, the forum featured a lengthy closed-door discussion with chief executives, where the prime minister addressed many questions. But the prime minister's talk, usually on the final day of the event, was canceled this year without explanation, prompting some chief executives to skip Monday and schedule their private jets to fly on Sunday night.

The China Development Forum also used to include a fairly open discussion on economic policies by Chinese corporate leaders and ministers a day before the opening ceremony, but that also did not take place this year.

Evan Greenberg, president and CEO of the Chubb Group, a large American insurer, co-hosted the conference's opening day on Sunday. The list of attendees included Tim Cook, Apple's chief executive, who was in China last week trying to revitalize iPhone sales, as well as Mike Henry, chief executive of BHP, the Australian mining giant.

In his speech, Mr. Li called for an improvement in manufacturing and an increase in services and consumption. He reiterated calls for Chinese households to replace their old cars and appliances, but did not say whether the government would provide money to help them do so.

Consumer spending in China has been lackluster as apartment prices have fallen by a fifth over the past two years, according to semi-official data. The number of home transactions has also plummeted. Owners complain that they must cut prices by up to half if they want to find buyers.

Real estate accounts for 60 to 80 percent of household assets, a much higher proportion than in most countries. So the near-collapse of the housing market has left many families feeling less prosperous and struggling to make mortgage payments.

Mr. Li briefly mentioned real estate and a related issue, local government debt, during a discussion on risks. Over the past four decades, he stated, “risks and challenges have not defeated us.”

Li said the government would seek to provide legal residency to more than 250 million people from farming families who have permanently moved to cities but have not qualified to reside there. Cities offer much higher medical, retirement, and educational benefits than rural areas.

But Li did not explain how municipal governments already running out of money could afford to offer these costly benefits.

The mantra of “new, quality productive forces” aims in part to allay concerns in China and abroad that U.S.-led restrictions on high-tech exports to China could curb its growth. In briefings before the forum, officials emphasized that manufacturing accounts for a large share of the country's economy: more than twice as much as in the United States.

“In China, you can see that it is constantly increasing and it is much higher than other countries,” Shi Dan, director general of economics at the Chinese Academy of Social Sciences, a government ministry, said in a briefing.

China's trading partners are concerned that more manufacturing will likely lead to more Chinese exports. The European Union is preparing to impose tariffs on electric cars from China. The European Union Chamber of Commerce issued a report last Wednesday warning that the policy could lead to deindustrialization in Europe, as European companies may not be able to compete with government-backed Chinese companies.

Companies that have relied on selling raw materials to China for housing and infrastructure construction have been closely watching the redoubled emphasis on high-tech manufacturing.

Andrew Forrest, chief executive of Fortescue, an Australian iron ore mining giant, said China will inevitably continue to spend heavily on infrastructure, including roads, rail lines and ports.

“The infrastructure situation won't really be a change, just an emphasis on manufacturing,” he said in an interview.

Chinese officials have made numerous promises to stabilize the housing market, but have offered few details on how to do so.

Li Xuesong, another director general of economics at the Chinese Academy of Social Sciences, said in a briefing that local governments could provide more apartments for public sector workers. But he did not address how local governments, many of which are in debt, would pay for these apartments.

After a recent collapse in sales of public land to developers, many local governments have had to cut salaries for municipal workers and needed help from Beijing to make interest payments. China's Finance Ministry has started a program to help some cities with their debt, provided they cut costly but popular programs to build infrastructure.

Helping consumers afford more spending is crucial, Wang Dan, chief China economist at Hang Seng Bank's Shanghai office, said at an online conference organized by the International Finance Forum, an affiliate of China's central bank. . “A direct cash transfer would still be the most effective way,” he said.

For now, the emphasis in China is on strengthening the supply and quality of goods, and not on worrying about demand.

“The growth momentum of investment in new driving forces is good,” said Liu Sushe, deputy director of the National Development and Reform Commission.

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