By Michael Roberts
The Chinese government is just completing its annual ‘two sessions’ or lianghui, where China’s political elite approve the economic policy agenda for the coming year. The ‘two sessions’ refers to two major political gatherings: the Chinese People’s Political Consultative Conference (CPPCC), a political advisory committee; and the National People’s Congress (NPC), China’s top legislative body.
These are ostensibly not meetings of the Communist party but instead are meetings of the Chinese state. The consultative meeting is largely symbolic with leading business and local leaders appearing for pre-arranged discussions. The real focus is the NPC which officially decides economic policy. In reality, it merely approves what the leading CP elite have already decided in advance. With around two-thirds of its members belonging to the Communist Party, the NPC has never rejected a bill proposed by the party.
China’s progress against economic plans
Premier Li Qiang presented the government work report, outlining key economic targets and strategies for the year ahead. This year’s NPC was also monitoring the final year of decade-long economic plan “Made in China 2025”, which aimed at making China self-reliant in key industrial sectors. 2025 is also the last year of the current (14th) five-year plan that state bodies and private industry are supposed to follow to meet economic objectives. The next plan (2026-30) will be outlined at next year’s NPC.
How has China been doing in meeting the targets set in Made in China and the 14th five-year plan? Well, according to the South China Morning Post, often a strong critic of China’s success, 86% of the 250 targets set have been met or exceeded. Measured in purchasing power parity (PPP) terms, China’s aggregate real GDP surpassed that of the US back in 2018.
However, the PPP measure of GDP estimates the value of goods and services that can be purchased with dollars within China. If we measure real GDP in international market dollars, then China’s GDP is still behind that of the US – but the gap is closing.
The gap with the US on GDP is closing because, although China’s annual real GDP growth is no longer in double-digits, it is still growing nearly twice as fast as the US economy.
China was the only major economy that avoided a recession during the pandemic slump of 2020 and managed to grow by 5% last year compared to the US, the fastest growing G7 economy, at 2.8%. Moreover, US real GDP grew by as much as 2.8% last year partly because net immigration raised the size of the workforce – more people, more output. US real GDP growth per person was much less.
US inflation rate higher than China’s rate
Ah, China’s Western critics say, but if you compare nominal GDP growth, which includes inflation, then US GDP rose 5.3% while China’s GDP rose only 4.2%. So in nominal terms China’s economy reached $18.6 trillion in 2024, compared to $29 trillion in the US, two-thirds below the US, compared to 75% in 2021. But this is a bogus comparison. The GDP gap in nominal terms widened partly because the dollar strengthened in world markets against the yuan and so boosted the US nominal GDP in dollar terms, but mainly because US inflation was much higher than in China.
Many Western mainstream economists argue that ‘moderate’ inflation is good for an economy. You see, if there is deflation (falling prices), then consumers may spend less on goods and services and save their money in the hope that prices will fall further and so economic growth will slow. Sure, hyper or accelerating inflation is bad news because people’s living standards will dive, the argument goes. But what is good is ‘moderate and steady’ inflation for capitalist enterprises to give them room to raise prices to maintain profits.
This is another ludicrous argument to justify the inability of Western monetary authorities to control price inflation. In no way is inflation good for working people. As one recent visitor to China put it: “Yes, it was absolutely horrible while I was in China – I only had to pay $13 for a meal for 2 people at a nice restaurant, $2.30 for 30 large eggs and $4 for a 30min taxi ride.” As another commented: “Everyone in the west is enjoying the rising cost of living. It’s a shame that the Chinese don’t have the chance to enjoy this.”
Various theories about China’s impending demise
In reviewing China’s economy for the ‘two sessions’, Western economists bang on about the impending economic crisis in China from ‘deflation’, ‘rising debt’, ‘property market collapse’, ‘under-consumption and over-capacity’ etc. These supposed problems are not only lowering China’s growth prospects, but could even cause a crash and an outright slump. These arguments have been bandied about for decades and I have discussed their (in)validity in numerous posts.
But let’s deal yet again with the argument that China’s growth success is totally dependent on investment in manufacturing for export and not on domestic consumption and unless China reduces its investment to avoid ‘over-capacity’ and instead develops a Western-style consumer economy, then it is destined for stagnation, so-called ‘Japanification’.
Private consumption is not being held back
First, it is not true that China’s economy is growing at the expense of household consumption. Private consumption growth in China has been much faster than in the major economies. That’s because faster economic growth is driven by faster investment growth. I repeat from previous posts: investment leads consumption over time, not vice versa as mainstream economics thinks (here the mainstream is even going against Keynes).
Labour productivity growth higher than in the US and Japan
As for Japanification – China is not stagnating like Japan. Take productivity growth. Even though China’s growth in labour productivity has slowed in the last two decades, it is still more than four times higher than in the US and six times higher than in Japan.
Total factor productivity (TFP) is a measure of how efficiently labour and capital are used to generate output. According to the US Conference Board, China’s TFP growth has been three times higher than the US and six times higher than Japan in the last decade or so.
Liu Qiao, dean of Peking University’s Guanghua School of Management, reckons that China’s average annual TFP growth has declined from 4 per cent to 1.8 per cent between 2010 and 2019. But even on his measure, TFP growth is still higher than the US at 0.5 per cent per year for the past 20 years. If labour productivity growth stays at about 4-5% a year and TFP growth stays around 2-3% a year from hereon, then 5% real GDP growth is achievable over the rest of this decade and through the next five-year plan, even as the working population declines.
China’s manufacturing output is the largest in the world
China has had the world’s largest manufacturing sector by output for 15 years running, reaching $5.58 trillion last year and contributing 36% of GDP. By contrast, US manufacturing accounts for just 10% of GDP, or $2.93 trillion. China’s economy is now driven by technological investments, no longer by unproductive investment in real estate, what the Chinese economic strategists call the “new quality productive forces”. More electric vehicles are on the road in China than in the US, and Beijing’s roll-out of 5G telecommunications networks has been much faster. China’s home-grown airliner, the C919, is on the cusp of mass production and appears ready to enter a market currently dominated by Boeing and Airbus. The BeiDou satellite navigation system is on par with GPS in coverage and precision.
China also beats the US in industrial robot density, with 470 robots installed per 10,000 employees in 2023 compared with 295 in the US. China is also about to match the US in patents with its global share rising from 4% in 2000 to 26% in 2023, while the US share dropped by more than 8% points. And China’s semiconductor production is one-quarter of global output compared to 16% in the US and 7% in Europe.
Since 2012, the Chinese Academy of Engineering (CAE) has compiled rankings for nine major manufacturing economies – including China and the US – in terms of scale, quality, structural optimisation, innovation and sustainability. In 2012, China scored 89 points, lagging the US (156), Japan (126) and Germany (119). In 2023, China was still in fourth place but had significantly narrowed the gap; the US, Germany, Japan and China scored a respective 189, 136, 128 and 125. The US may still lead in new ideas but China is leading in applying them effectively, as the Deep Seek AI story shows.
Increased borrowing to fund central government spending
At the NPC, the Chinese leaders set the 2025 GDP growth target at “around 5%”, keeping the same pace as the prior year. Li Qiang announced plans to boost domestic demand by expanding fiscal spending. The central government will increase borrowing to do so, with the official government deficit rising to 4% of GDP, the highest ratio in 30 years.
Also defence spending will rise by 7.2%, matching last year’s growth. So the overall budget deficit will increase to near 10% of GDP. Regarding inflation, China is lowering its annual target to around 2% for the first time in over two decades. With wages rising at more than double that rate, average real incomes will continue to rise.
Why has China succeeded in avoiding slumps including the Great Recession and in the pandemic? Why has it motored ahead with unprecedented growth rates in such a large economy, while other large so-called emerging economies like Brazil or even India have failed to close the gap with the major advanced capitalist economies?
It’s because, although China has a large capitalist sector, mainly based in the consumer goods and services sectors, it also has the largest state sector in any major economy, covering finance and key manufacturing and industrial sectors, with a national plan guiding and directing both state enterprises and the private sector on where to invest and what to produce. Any slump in its private sector is compensated for by increased investment and production in the state sector – profit does not rule, social objectives do.
The challenge posed by US tariffs
Now there is a new challenge for the Chinese economy. The government is gearing up for Trump’s trade war. Trump’s increased tariffs on Chinese exports to the US and sanctions on Chinese technology are major threats to China’s growth targets. China is diversifying its trading partners, but the US is still China’s largest export market (15%).
JPMorgan reckons that the contraction in China’s exports to the US from Trump’s tariffs will reduce GDP growth by 0.6 percentage points over 2025-27, with the majority of the impact being felt in 2026-27. As US companies look for domestic production to substitute for more costly imports, this could dampen China’s GDP growth further over 2028-29.
China could combat the rise in the prices of its goods sold to the US by devaluing the yuan, but that could lead to an inflation shock. So instead the NPC is going for fiscal and monetary stimulus worth about 3% of GDP. It remains to be seen if that will boost domestic production and consumption enough to compensate for any GDP losses from trade.
From the blog of Michael Roberts. The original, with all charts and hyperlinks, can be found here.
