For the first time in nearly 30 years China has abandoned setting a growth target for its economy. That's not good news for an Australian economy over-exposed to China's fortunes but it is even worse news for China and its global leadership aspirations.
China's Premier, Li Keqiang, in an address to the National People's Congress on Friday, cited the pandemic and the "economic and trade situation" for the absence of a specific target for economic growth.
After claiming growth of 6.1 per cent last year, China experienced a 6.8 per cent plunge in the economy in the March quarter during the worst effects of the virus' outbreak in Wuhan.
While there was a rebound in industrial activity in April as the lockdowns ended – industrial output grew by 3.9 per cent – and coal consumption returned to more normal levels – retail sales remain well below pre-pandemic levels.
The International Monetary Fund has forecast growth in China could be only 1.2 per cent this year. Others believe it could be about 2 to 3 per cent.
Regardless, the collapse in the growth rate for an economy that has averaged about 10 per cent growth in GDP since it was opened up in the late 1970s underscores how badly battered the economy has been by the combination of the pandemic and the continuing effects of the trade war with the US.
China's leadership has always pursued high-growth policies because of the perceived risk to the dominance of the Communist Party of unemployment and the social tensions it generates in an economy where nearly 400 million people exist on less than $US5.50 a day.
Its ability to manage this economic downturn, however, is constrained by the legacies of the past and by the damage that the Trump administration's trade war has done, and is continuing to do, to the economy.
The legacy issue related to China's response to the global financial crisis, during which it launched the world's largest stimulus program. That was officially close to $US600 billion ($918 billion), or about 13 per cent of GDP, but may well have been significantly larger.
Most of it went into massive infrastructure and housing programs and much of it was wasteful, leading to ghost cities and underutilised infrastructure and local governments and state-owned enterprises laden with debt.
It left China's corporate sector (dominated by state-owned or controlled enterprises) with the highest debt-to-GDP levels in the world – close to 160 per cent – and a degree of leverage in its financial sector that threatened its stability. In recent years reducing that leverage and cleaning up its SOEs has been a major focus of the central government.
The trade war crimped China's growth last year, complicating its attempts at financial reform and forcing it to push liquidity into its banking system and provide funding for infrastructure, tax concessions and other stimulatory measures.
It also limited China's ability to respond to the pandemic without releveraging an economy and financial system it already believed was over-leveraged.
It has set a revised goal of creating about 9 million urban jobs this year – the lowest since 2013 – and is targeting a budget deficit of 3.6 per cent of GDP, up from 2.8 per cent in 2019.
The fiscal stimulus in a package of measures announced by the Premier is estimated at 4 per cent of GDP. In dollar terms that would be similar to the size of the 2008 stimulus but in an economy that, thanks to the turbo-charging of its growth as a result of the GFC stimulus, is about four times its size in 2007.
If China's economy is weaker and its flexibility to respond to the pandemic constrained relative to its position ahead of the financial crisis, the outlook is also less rosy.
The trade war is reshaping global supply chains as companies – and not just US companies – seek to reduce their over-dependence on China. Contrary to the ambitions of the Trump administration, that activity isn't flowing back to the US but to other economies in Asia as well as Mexico and Canada.
That isn't stopping the US from upping the pressure on China, with a solvency-threatening tightening of the restrictions on component supply to Huawei, an attempt to reduce the flow of capital to the largest of Chinese companies by insisting on US auditing of US-listed entities and Trump's musings about cutting of the "whole relationship" with China, whatever that might mean.
The pandemic, the global finger-pointing at China for not providing timely warnings about the outbreak, the increased hostility from an election-focused Trump administration and the impact of the coronavirus on the pre-existing pressures for de-globalisation don't augur well for China's longer-term economic outlook.
While China has had significant success in shifting the emphases in its economy from exports to consumption, which now accounts for about 60 per cent of its GDP growth, the trade war's impact on its exports and the pandemic's effects on consumption are throttling growth.
The effects of the pandemic may or may not be transitory but the trade tensions, the rearrangement of supply chains and the pressure in some jurisdictions to de-globalise (in reality, pressure to reduce the developed world's reliance on China as the world's factory) will persist.
There's an interesting question whether China's new aggressive assertiveness – the proposed new security legislation in Hong Kong or the threats to Australian exports because of Scott Morrison's advocacy of an inquiry into the origins of the virus – are expressions of relative strength or vulnerability.
With the social contract that underpins the party's control of China threatened by the economic downturn and the rapidly changing nature of its economic relationships with the rest of the world, nationalistic diversions might explain the increased belligerence.
It is conceivable that, given the "command and control" nature of China, the leadership will be able to generate a soft landing for their economy and that Australia and other developed economies will still have to rely on China to drive their growth, and global growth.
There is, however, now a question mark over the growth model that has sustained China for more than 40 years and created the world's second-largest economy and whether it can continue to evolve as successfully and seamlessly as it has in the past. That provides pause for a lot of thoughts, here and elsewhere.
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