China fails to work out a plan to ease its economic malaise

Premier Li Keqiang issued a bleak warning on Wednesday about the perilous state of China’s economy, telling more than 100,000 officials in a nationwide video conference that they urgently needed to boost growth, reduce unemployment and secure the summer grain harvest.

But the lack of any concrete new initiatives from the central government and muted state media coverage of the event suggest that there is still no easy way out of the economic crisis triggered by president Xi Jinping’s controversial zero-Covid policy. The strategy has brought commercial activity to a complete or near halt in dozens of cities over the past three months.

Just a few hours after Li spoke, Chinese state television’s main evening news broadcast buried a brief and much softened version of his remarks in the middle of its bulletin. It led instead with a long item about Chinese police officers — who pride themselves on being “the handle on the Chinese Communist party’s knife” — heaping praise on Xi.

The footage showed more than 1,400 uniformed officers applauding Xi and carried a clear message for cadres across the country that mounting concerns about the world’s second-largest economy would not supplant pandemic control as the party’s priority.

“After watching the news, it feels pretty hopeless,” said one government official in eastern Jiangsu province, who is trying to help revive the local economy. “There was much more coverage of everyone applauding [Xi].”

Li and Yi Gang, the central bank governor, deepened local officials’ malaise when they implied that there was relatively little that the government was willing or able to do to help them, even though the economic challenges, according to the premier, were “to a certain extent greater than those experienced in 2020”, when the Covid pandemic erupted out of central Hubei province.

In the first quarter of 2020, China’s economy contracted 6.9 per cent year-on-year, the first officially recognised annual decline in more than 40 years.

Li even raised the spectre of potential food shortages. While most international attention has focused on Shanghai’s strict measures, which began in late March and have only begun to ease gradually over the past week, lockdowns and regional transport restrictions have also affected large agricultural regions, such as Jilin province.

“Harvesting absolutely cannot stop,” he told the officials, according to an off-record transcript of Wednesday’s emergency meeting that was confirmed by three people briefed on the premier’s comments. “[Food security] is a fundamental responsibility of local party [cadres] and governments. If you cannot stabilise [agricultural] production, you will be held accountable.”

Li and Yi, however, offered only a modest expansion of a corporate tax relief initiative and new policy loans of Rmb800bn ($118.7bn), an amount equivalent to just 0.7 per cent of gross domestic product.

During the depths of the global financial crisis in 2008 and 2009, Beijing unleashed a stimulus effort equivalent to 13 per cent of annual economic output.

“Recently, a few provinces submitted reports to the State Council [China’s cabinet] asking to borrow money,” Li said. “[But current] transfer payments to local governments are the largest in history . . . So let me give you the bottom line, the rest depends on you local governments.”

Analysts argue that in areas where strict lockdowns have sapped demand from companies and consumers, more bank credit is about as effective as — according to the analogy attributed to John Maynard Keynes — “pushing on a piece of string”.

“Without the central government stepping up, the upside for fiscal support is capped,” said Trey McArver at Trivium, a Beijing-based consultancy. “A V-shaped recovery is extremely unlikely.”

David Zhang, who owns a small market research firm in Beijing, said that “cheap loans for SMEs won’t help — my problem is a lack of business and rising operating costs”.

Zhang, whose revenues have fallen by more than 50 per cent over recent months, added that “the situation is worse than in 2020”.

Many small business owners also complain that Li’s tax rebates often come with conditions that make them impossible for struggling small and medium-sized enterprises to claim.

In some regions, cash-strapped local tax bureaus will only give one party in any given transaction tax relief, which is usually grabbed by larger state-owned enterprises and foreign investors at the expense of their smaller, and predominantly private sector, SME suppliers.

“Most of our clients are bigger than us and there is no way they will give up tax benefits to help us,” said Li Bin, who runs a small advertising company in Nanjing, near Shanghai. “We are too small to make our clients sacrifice for us.

“Business is very bad.”