Transcript of The Two Sessions: What Will China Do on Stimulus, Trade Wars, and Tech Competition?

He was previously the practice head of China at Eurasia Group and the US Treasury Department’s chief representative in China.

• Lizzi C. Lee, who is a CCA fellow on Chinese economy and the newest member of our full-time team. She previously earned a PhD in economics at MIT and worked as a journalist for the New York-based independent Chinese media outlet, Wall Street TV.

• Guoguang Wu, who is a CCA senior fellow on Chinese politics and a senior research scholar at Stanford University’s center on China’s economy and institutions. He is one of the leading scholars of Chinese elite politics and recently wrote an excellent paper for CCA on the rise of CCP young elites and Xi Jinping’s Tsinghua new army.

The way it’s going to work today is that we’ll start with a conversation between myself and the speakers, and then we will get to a wide-ranging Q&A with the audience. For everyone tuning in, you should be able to see a Q&A button in your Zoom windows, and please feel free to ask a question at any time of the conversation, and we’ll try to get to it at some point.

Economic Targets and Fiscal Policy

NEIL THOMAS: Without further ado, let’s get started on the two sessions. I want to turn to you first, Michael, and talk about the big headlines that always come out of the government work report every year, which are these annual economic targets. Yesterday, Li Qiang announced that GDP growth will be targeted at 5%, the fiscal deficit ratio at 4% of GDP, 2% inflation, 5.5% unemployment. What do these targets tell us about China’s economic priorities this year? And what kind of fiscal policies and monetary policies can we expect to be coming?

MICHAEL HIRSON: Thanks, Neil. Very excited to be with my distinguished fellow panelists here. Very interesting set of targets announced in the government work report. A little bit of a split screen, if you will.

On the one hand, you have some pretty clear signals that China’s leadership recognizes that a higher rate of growth or sustaining a high rate of growth is important for social conditions, for the other areas that are important to the leadership. And you see that in the 5% growth target, which is relatively ambitious, given the headwinds potentially coming from US-China trade risks. You also saw, as you noted, an increase in the official fiscal budget deficit from 3% to 4%. That’s the highest level in many years. So it’s another signal of desire to do more to sustain growth. And then there was a focus on boosting domestic demand. That’s the top priority for the year.

On the other hand, if you look at the details of what was announced, the full stimulus outlined was not particularly aggressive in the details and probably not enough to secure that 5% growth target, unless a lot of things go Beijing’s way, including with US-China trade risks.

I think it adds up to a sense by the leadership that they want to refocus on growth and development, but still a desire to do only as much as necessary in terms of stimulus to get there. And there’s really two implications for that, I think. One is that we’re probably going to need, Beijing will need more stimulus later in the year in order to secure that 5% growth target. And this will be an interesting question of how quickly policymakers come in with that support. There was a tone of being proactive at the NPC, but we’ve also seen China’s leadership over the last two years kind of fall behind the curve when it comes to providing support as necessary.

The second implication is in terms of just where we see the strength of the economy this year, I think it’s going to stay fairly subdued given that there is not a very strong stimulus surge. So we’ll probably get to 5% growth in terms of real GDP by the end of the year. But I don’t think we’re really talking about a very strong recovery on the demand side of the economy. And I don’t think that China is likely to break out of the deflationary dynamics that it’s in right now.

So I’d say that’s where we are in terms of where the government targets lead us. But of course, there’s a lot more to think about in terms of the priorities, including the industrial policy and tech side, which I know Lizzi will discuss and I think still continues to be really the main priority of Xi Jinping and the leadership rather than boosting the demand side of the economy despite the commitment to do so as the top priority in the work report.

NEIL THOMAS: Just a follow-up there. So we got this announcement that there’ll be a record level of bond issuance for local governments, 4.4 trillion yuan, increase of 500 billion. We’ve got 1.3 trillion yuan of these ultra-long special treasury bonds. That’s up from 1 trillion, the first issuance last year. There’s an extra 500 billion yuan to help big state banks to recapitalize, and this is broadly in line with expectations, but definitely on the lower side.

Given the pressures facing the Chinese economy, given as you said, maybe this isn’t enough to get to 5% unless everything goes right, why wasn’t there more stimulus? Could you expand upon what’s holding Beijing back, especially as we got some Chinese economists in official advisory positions ahead of the two sessions suggesting maybe we should have 3 trillion yuan of special ultra-long treasury bonds, maybe we should have 10 trillion yuan? That’s the kind of scale that a lot of Chinese economists in China feel that the economy needs. So why so little given the context even though this is a record level of fiscal stimulus?

MICHAEL HIRSON: It’s a fascinating question, and there’s different elements to it. I think on the part of the top leadership, on the part of Xi Jinping, there is a real desire to stay disciplined and focus on the long-term policy agenda. Xi is concerned that giving in to too many demands for stimulus would exacerbate local government debt risks, creating the potential for a financial crisis down the road, and would also leave China with not enough policy room to respond to developments.

Those developments could include a very nasty four years dealing with Donald Trump. So using all your fiscal capacity now to stimulate the economy when you could need to turn around next year or the year after with really aggressive support strikes, I think, Xi as being potentially foolhardy, sort of caving into short-term expediency and losing sight of those long-term targets.

Then there’s also this interesting political economy question of the Chinese leadership wanting to direct resources to the areas that it thinks are most critical for China’s trajectory, which very much involves, I think, the industrial side of the economy, industrial upgrading, tech, innovation, AI, semiconductors, etc. And still really reluctance to give out cash to households, which would be, I think, now the majority of probably Chinese policy advisors, economists would say this is something that the Chinese economy could use very much. But that doesn’t still align or it’s aligning only slowly with where the leadership sees the priorities for where it wants to go.

NEIL THOMAS: It’s a fascinating dynamic, and I think that it’ll be a watch point across the year ahead, in terms of if and when more stimulus will happen.

Consumption Policy

NEIL THOMAS: Just want to stay with you briefly, Michael, to follow up on a point you made about industrial innovation, that kind of broad set of tech issues still being this really important priority. One of the biggest watch points for this year’s work report and the two sessions more broadly was whether there’d be movements on consumption policy. It’s been a big issue. Obviously, sentiment is not great. There’s influence from the property crisis or correction, negative wealth effect on households. And there’s a lot of arguments in China for rebalancing away from investment and towards consumption.

I wonder if you can just explain to us briefly, what the issue is with consumption in China, what was new in the work report, and whether this will make much of a difference in boosting consumption levels in China.

MICHAEL HIRSON: I think you can look at the consumption issue on two different levels. There are the structural reasons why consumption in China is not very high that relates to income distribution within the country, the fact that the safety net is still underdeveloped, so Chinese households save at a high rate. There’s a lot of structural issues that are kind of the long-term dynamics.

Then there’s the current macroeconomic situation and the reasons why that is contributing to weak consumption. I’d say really two big factors there are, number one, the job market remains very weak in China. Still hasn’t really recovered from the pandemic and from the loss of construction jobs coming from the property sector. And then two, housing prices are falling and housing is the most important asset for Chinese households. So if their asset values are declining, households feel less confident spending.

What we saw at the two sessions was just the door cracking open still very gradually to doing more direct support for consumption. So 300 billion dollars to fund a trade-in program for appliances and some other consumer goods, an expansion of a program we saw last year, and a small, pretty modest amount of direct transfers to households.

But set against those macro challenges of a weak labor market and falling housing prices, I don’t really think that this is going to be a very powerful boost. So still a very gradual movement of the leadership towards being comfortable with doing more direct support for consumption. We’re not really there yet in terms of a very forceful push.

NEIL THOMAS: It seems like positive moves, but still very much incremental rather than big structural changes, but very slowly moving in the right direction perhaps.

Private Sector and Entrepreneurship

NEIL THOMAS: I want to turn to you now, Lizzi, on another of the major focuses of the commentary and the conversation leading up to the two sessions, which was Beijing’s attitude towards the private sector and towards entrepreneurs, private firms. There was this very rare symposium that Xi Jinping hosted with a bunch of private entrepreneurs, tech titans like Jack Ma and Ren Zhengfei, the CEO of Huawei. That was February 17th, and that created a huge amount of attention, a lot of buzz, about maybe China’s turned the corner on the tech crackdown and some excitement, but also caution given that there haven’t been a huge amount of new policies announced yet.

But we have just had Li Qiang’s work report. We’ve had Xi Jinping discuss private enterprises with the NPC delegation from Jiangsu yesterday. So what have they been saying, and does this represent a new approach, and will it make a difference on the ground for businesses and investors in China?

LIZZI C. LEE: Great. Well, thank you so much, Neil. I think this is indeed the most significant message that’s coming out of the two sessions. Just one minor point before I answer your questions. Some commentators are criticizing this year’s government work report for lacking of details, but I think it’s important to understand that the government work report is a high-level agenda-setting document.

It’s not supposed to have granular details. I think to actually see what’s going on on the ground, first you look back to the provincial two sessions to see what each local government or province is actually implementing or actually doing on the ground. And then you look at the follow-ups. So that’s just sort of a general comment before I answer your questions.

And as you point out, yes, Beijing did make a big show of reassuring the private sector in this year’s two sessions based on the information we see so far.

Xi Jinping’s Approach to Private Enterprise

First, there’s Li Qiang’s government work report, which hits all the expected notes, right, protecting entrepreneurs, cutting red tape, and I think really importantly, stopping predatory law enforcement. The local term is “Pharisees Fishing,” which refers to this aggressive cross-province crackdown on private businesses that really terrified many entrepreneurs. And also importantly, Li Qiang specifically acknowledged the damage of “Neijian,” this hot-throat competition that’s really crushing profitability. And he also promised to clear government debts to private firms, which is a nod to the cash crunch that has left many businesses struggling.

But I think the strongest signal, as you point out, came from Xi Jinping himself when he spoke to the Jiangsu delegation. He explicitly couched the private enterprise symposium as a “spirit,” right. And as you know, not every meeting with Xi Jinping earns this level of party codification. So when a meeting is enshrined as a “jingsun,” as a spirit, it’s really a top-level directive that will be studied and implemented across the system. It’s also a signal for consistency. So once something is a “jingtion,” it’s not going to fade away very fast.

You’re going to hear it repeatedly, at least in rhetoric in state media and also be propagated throughout the bureaucratic system. And I think that really makes this shift or recalibration, which I’m going to talk about later, really impossible to ignore. But I also wanted to caveat that statement a little bit. It’s not a sign that Beijing is reversing its approach to private economy. It’s not a sign that Beijing is now calling for animal spirits, losing control.

Importantly, all this reassurance to the private sector entrepreneurs is still framed under this familiar term, “two unwavering principles,” which is basically party speak for keeping the state dominant, using the state to guide private enterprise. And I think that’s really important. It’s not a reversal, it’s a recalibration. Beijing doesn’t just want the private firms to recover and start to innovate and invest. It also wants them to fall in line with party priority.

Private Firms and National Tech Priorities

And I think the clearest example we see is in tech, right? If you look at Black Mist’s Ocone, DeepSeek and China’s latest AI breakthroughs from Alibaba as you pointed out at the top of the meeting. They’re not coming from state-owned enterprises. They are from private firms.

And with US-China competition over high-tech, now the party really needs them to be aligned with national priority. So I think that’s important to note. And also, you see leading up to the two sessions, there’s this coordinated kind of propaganda campaign, right? The state media is basically working overtime last weekend to rewrite the narrative. Qiu Xi, an article in Xinhua, has a long commentary framing Xi Jinping as a long-term supporter of private enterprise.

Xi Jinping’s past record in Fujian and Zhejiang was being repackaged as proof that today’s AI boom, China’s tech breakthrough, was basically an extension of his past policies. While incidentally, both Game Science Studio, the maker of the blacksmith, and the innovator behind DeepSeek came from Hangzhou, which is a city in Zhejiang. So in that sense, they might be related, but the message is very clear. Xi Jinping himself is not admitting mistakes. It’s a natural extension of his past success.

And, it’s not a reversal of what the state has been doing. It’s a recalibration of this relationship. It’s not about unleashing the spirit of the private sector. It’s about repurposing or realignment with the state.

Local Competition for Private Sector Innovation

NEIL THOMAS: I think that’s a really important point and really important nuance to the discussion about this issue, which can cause people’s tempers to run high. We’ve been following this trying to work in China for some time. But I’m curious as to whether you’ve detected in either the government work report or some of the provincial work reports that indeed you highlighted as being much more specific policy plans, for how this high-level sentiment is going to actually play out on the ground.

Are there any new policies that are coming down the line to help private firms or entrepreneurs? Like, what’s going to be different this time, as far as we can tell, or is it too early to say?

LIZZI C. LEE: I think it’s still too early to say. I think what we will see is more legislation to kind of codify protection of private entrepreneurs in terms of law and regulations, then it will be sort of deployed throughout the system. But I do want to point one thing out.

There’s another term which I think is really significant coming out of this year’s two sessions, which is this idea of “Yinding Jie Yi,” right? So different localities, different municipalities, different provinces, they should have their own policy initiatives. And they’re almost locked in this horse race to see who can attract the best private firms, who can come up with the next DeepSeek. I think that’s a really important thing to be on a watch out for. China has always had a “Xi Feng Jing Biao Cai” model, so local championship model.

But previously, they were basically competing over GDP growth. And now I think next stage of China’s bureaucratic performance evaluation, they will be competing on something else, whether it’s tech, new quality productive forces, it’s who can attract the most the best private entrepreneurs. I think that’s something that we should be on the watch out for in terms of what’s actually playing out at the local level or on the ground.

Fiscal Decentralization and Economic Policy Shifts

NEIL THOMAS: Great. I think that’s super useful. And I don’t have another green shoot coming out of the government work report that Li Qiang delivered, which was circling back to this pledge in the third plenum to pursue fiscal decentralization and allow local governments to collect more revenues from consumption taxes. And perhaps in the longer term, to gradually shift the incentives of local governments to encouraging consumption, rather than just production, by potentially expanding the consumption taxes as part of the overall tax base.

So these policies have been flagged at a high level. They don’t always get implemented as aggressively as we might want, and that’s kind of where the political will comes in, in the next few months and years. Like, is this something that the top leadership are going to decide as a priority and something they’re really going to be monitoring and evaluating local governments on?

And so, it’s good to see these signals. But as you point out, implementation is really the key in the year ahead. But there’s also another part of your analysis of Li Qiang’s work report that I think is super interesting, Lizzi, that I want to spend a bit of time on, which is a shift you’ve identified in economic policy making, not so much the what, but the how, which is focusing on speed and decisiveness, rather than kind of gradualism and incrementalism. So I wonder if you can just give us the context of what was said and what might it mean in practice for people who are following economic policy making in China.

Shift to Decisive Economic Policy

LIZZI C. LEE: Thank you so much. I think that’s also a critical message in Li Qiang’s government work report. It’s probably the most memorable quote from Li Qiang’s hour-long speech, which is not usually very exciting. So Li Qiang’s message in the government work report, I think the most important one is this tone shift. There’s this one line that particularly stood out to me. In English, Li Qiang said:

“When introducing and implementing policies, we need to do so as early as possible, on the side of being too early, going too big rather than too late. We need to raise against a variety of uncertainties. And once a decision is made, we need to go all in, provide full support in one go.”

And for this audience, that’s a clear break from Beijing’s philosophy in terms of economic management. In fact, Li Qiang himself previously advocated this approach, which is a traditional Chinese medical concept. That means we need to strengthen the fundamentals, we need to go slow and we need to go steady. There’s no rush. We don’t need to create more bubbles in economy. We need gradual measured intervention aimed at reinforcing long-term stability rather than going after immediate impact. And this message is just the opposite of that.

So what’s the reason behind this shift? I think the reason is past small reactive incremental policy adjustments just fizzled out. They were not sufficient or essential enough to restore confidence in Chinese economy. We saw minor tax cuts, small regulatory tweaks, similar measures, small “buy one get one” consumption coupons. When they were first introduced, we saw a spike in expectations, spike in economic activities briefly. And then they just faded as businesses and investors are still kind of in this wait-and-see mode to see what will follow. So there was no decisive break. There’s no decisive uptick in sentiment.

And now we know China’s economic recovery since COVID is still very fragile and confidence level is still very low, whether it’s consumers reluctant to spend on big-ticket items or companies hesitant to invest. And we know in China, perception matters as much as fundamentals. If you look at the fundamentals, they’re actually not that bad. But this vibe, this sentiment, this level of confidence is still very low. I think that’s why it’s such a direct reference to restore confidence or this reference to market psychology in the government work report.

Market Psychology as Economic Policy

And in the presser after Li Qiang’s briefing, a state council official actually put this very explicitly. He used a term, a tongue-in-cheek expression among stock market traders: “If you see three bullish candlesticks, you will change your religion,” which is an explicit acknowledgement that asset prices and policy signals can shift real economic behavior. Whether people feel wealthier, more optimistic – if the sentiment itself is restored, they are more likely to spend, invest, take risks.

Which brings me to another point. This is why stock and property price stability, for the first time in the history of China’s two sessions, are being framed as part of the macro policy toolkit. So this is really a significant change. I don’t think analysts paid sufficient attention to this part. Asset price itself, confidence itself is now being framed as an economic variable. Management of market expectation is being framed as a key priority.

So this is something that I just wanted to highlight, and we can talk more about whether we’re going to see actual uptick in confidence. And my answer to that question is, it’s not really about what Beijing says or even Beijing does. It’s more about how much buy-in private entrepreneurs are going to do. Are they going to believe the message? Are they going to hedge? Are they still hesitant? So it’s kind of an ongoing negotiating process between the private sector and the state. But I think from Beijing’s point of view, the recognition is very clear: Market expectation itself needs to be actively managed.

Political Context of the Two Sessions

NEIL THOMAS: I think that’s potentially good news for investors in China. And also, connecting it back to what Michael was saying earlier in the conversation, does suggest that if we see an escalation in US-China trade and technology war, Beijing may not be hesitant in responding to ensure that this nascent but certainly emergent economic recovery keeps going.

And just to reinforce your point as well, there’s been a lot of very positive affirmations in Xi and other leaders’ statements about the September Politburo meeting that preceded this first tranche of monetary stimulus and eventually led into fiscal stimulus last year. And that’s when the stock market roared back to life and started exiting recession correction territory. And now Chinese stocks are being some of the world’s best performers this year, and it’s obviously given a boost more generally to confidence in the Chinese economy. So that maybe something that they’re looking to sustain.

But obviously there’s only so much that one country’s leaders can do to control stock prices. So might be setting themselves up for some more interventions needed if indeed the international political environment deteriorates as we get further into the Trump presidency.

Right. And we can get into all this in the discussion and questions, hopefully. But I do just want to turn now to zoom out and get some of the context for this week-long session of meetings. There are all of these policy announcements and reports coming out. But this is coming towards the middle of Xi Jinping’s third term as general secretary, the middle of Li Qiang’s first term as China’s premier.

So I’m curious, Guoguang Wu, if you can just help outline for us what is the political context of this year’s two sessions. Is Xi Jinping still all powerful? Is he being affected at all by the economic difficulties that China’s experienced? Is that something that he’s worried about? And is it politics in Beijing that might be motivating this increased focus on growth this year? If you just help us unpack these political dynamics, that would be, I think, really important context.

GUOGUANG WU: Good question. Thank you for that. China basically has a political routine to emphasize economic issues. But this year, the emphasis on economic issues is particularly highlighted. So many different things paving way to the two sessions. Our colleagues mentioned many of them. Also I’d like to highlight the publication of Xi Jinping’s work on economic works. And also Xi Jinping’s series of speeches on economic issues. So is that any signal indicating the Chinese government’s refocus on economic development rather than, as previously emphasized, on security issues?

China’s Preparation for Economic Challenges

“Basically, my answer is not. As you just highlighted, political context is very important. I think the current emphasis on economic growth in China, as evidently shown by the Two Sessions, is basically stimulated or motivated by China’s preparation for the forthcoming trade wars with the United States. China already feels the pressure in this regard, so China needs to better prepare its economic development to fight against that,” Guoguang Wu explained.

“I don’t think there is any fundamental shift in terms of political focus or political rationale. But policy change is very important. I want to add only one point, which is about central-local relations. From Xi Jinping’s speech at the Jiangsu Provincial Delegation, he particularly emphasized the role of so-called ‘economically powerful provinces’ and their leading roles in promoting Chinese economic growth. This means the Chinese leadership has somehow shifted back to policies promoting regional disparity for economic development.”

“We know that when Xi Jinping came into power, he always emphasized things like common prosperity and actively reducing regional disparity. But those policies are not so good for promoting economic growth. So technically, he’s shifting back to this old model of stimulating economic growth. But these technical shifts in policies have nothing to do with changes in domestic politics. Xi Jinping firmly controls Chinese politics, particularly the party’s leadership machine.“

“This kind of technical shift in policies also helps to indicate his firm control of policymaking. If he shifts back to old policies, his political status would not be challenged. He has the power to do that. So the basic political context would be China’s relationship with the United States, particularly in economic terms, between the two countries.”

US-China Relations and Geopolitical Strategy

Neil Thomas followed up: “That’s a set of fascinating points that I really haven’t seen covered in much of the media or even academic reporting on the Two Sessions. To follow up on what you said about US-China relations, the US obviously still looms large in China’s foreign policy, and there’s still a lot of rhetoric from Xi and other leaders about how challenges to China’s economy from the external environment are deepening. We’ve seen more of that language since Trump’s election last November. So how do you think Xi will approach diplomacy with Trump going forward this year? And how much do you think he’s worried by US tariffs, sanctions, and export controls? Does he want to resist and push back, or does he want to meet with Trump and do a deal?”

“Before talking about US-China relations, we need to talk a little about general geopolitics and world politics,” Wu responded. “I think Xi Jinping would be happy to see the US-European relations with a lot of troubles. Regarding US-China relations, I think Xi Jinping worries a lot, not really about what has already happened, but about what has not happened so far.”

“I think there are two unexpected things regarding the Trump administration’s foreign policy toward China. First, people expected that China policy would be the focus or at least a priority for the second Trump administration’s foreign policy. But it seems that so far it’s not. The administration has been in power for more than months but hasn’t done a lot on China policies. Would that mean a bigger storm is coming in the future? Xi Jinping must worry about that.”

“The second unexpected thing was the relatively moderate tariff over China and the gradual approach from the Trump administration. What does that mean? I think Xi Jinping and Chinese leadership worry about that and spend a lot of time interpreting it. Compared to the US’s relatively moderate policies on tariffs, the Chinese responses have been really harsh and hardline.”

“Just recently, the Chinese foreign ministry spoke about the trade war between China and the United States, and also mentioned world wars. That was really harsh. Trade war is trade war—why mention something beyond trade war, like military war? I think this is not only an emotional response, but indicates that the Chinese side is trying to gain some bargaining chips and lift its profile to gain advantages for future negotiations with the United States over tariff issues. This hardline attitude could indicate China is preparing to negotiate with the United States, to make a deal, but really wants to gain more in the deal-making.“

US-China Relations: Multiple Perspectives

Neil Thomas then brought in the audience: “Now I’d love to bring in our audience. If you have a question, please submit using the Q&A tool. But first, I want to take on this really hot-button issue of US-China relations and get perspectives from Michael and then Lizzi as to where you think this is going and how much do you think this actually matters for China’s economy this year?”

Michael Hirson responded: “I think it does matter quite a bit. What is confusing for China’s leadership and for all of us is that we’re seeing things develop along two tracks simultaneously by the Trump administration. One track is increasing tariffs on China—in only two months, Trump has already increased US tariffs on imports from China more than he did in his first term. And on the other hand, he’s exploring a deal because I think he is quite interested in that.”

“One of the problems that Beijing has, as Guoguang alluded to, is trying to understand what Trump wants. That makes it difficult to make concessions on an issue like fentanyl when they’re trying to build up leverage. Until they have a sense of what’s on the table with Trump, it will probably be something of a standoff in the near term. But I do think we will move into a phase where there will be exploration of a deal. At the same time, I don’t think the tariff threat is going away even as the two sides explore a deal.”

Lizzi C. Lee added: “I don’t have much insight to add. I would just reference a Bloomberg article that was just published—a long deep dive about how Trump is prompting China to rethink its approach to the economy. The idea is that external uncertainties reinforce Beijing’s pivot to focus on domestic demand and domestic consumption. I think that’s going to be another motivation behind this messaging shift that we saw recently. The Bloomberg report has a lot of fascinating details. I highly recommend that piece.”

Foreign Investment in China

Neil Thomas posed an audience question: “How much of this tone shift at this year’s Two Sessions is aimed at foreign companies who are doing business in China or trying to enter the Chinese market? Will this push benefit international companies as well as Chinese companies?”

Lizzi responded: “Absolutely. In fact, just one week before the Two Sessions, we saw significant opening of China’s critical sectors including telecom, healthcare, and other previously strategic sectors that were largely closed to foreign investors. There’s a real urgency among Beijing’s leadership to court back some of the FDIs that were previously fleeing China.“

“But as is typical with China’s political economy, implementation and execution are going to be key. How those initiatives and calls for action play out at the locality level is crucial, because more often than not, when you’re dealing with Chinese bureaucrats, you’re dealing with those at the local level, not the central level.”

“During Xi’s talk to the Jiangsu delegation, there was also this call that ‘once something is decided at the central level, you guys must implement that to the letter.’ There are two ways to interpret that. First, it’s a focus on execution—it’s not just what we intend to do, it’s how you actually do it. And second, it’s also an acknowledgment that there is some hesitation or slow movement at the local level when it comes to policy implementation.”

“Watching that tension between central government and local bureaucrats is going to be fascinating. That also determines how those policy initiatives, whether they’re friendly messages to foreign businesses, actually have a real impact on the ground.”

Michael added: “I think it’s important. I think Lizzi captured it well. One of the key issues is going to be whether these measures are powerful enough to offset the pressures of ‘derisking’ that are coming from foreign investors in China and pressures from their home governments. The Trump administration recently put out a very hostile document regarding its views toward Chinese investment. So there is still this question of how much the policy effort from Beijing can counteract these stiffer headwinds coming from the external side.”

Tax Policy and Fiscal Reform

An audience member asked about potential changes in tax policy given the lack of big stimulus and the increasing importance of common prosperity policies.

Michael responded: “It’s a good question. I didn’t focus on this for the NPC specifically. I think where we are basically is that there are some important tax reforms on the table for the long term that are meant to give local governments more resources and help accomplish policy goals. But the problem right now is the economy, and in particular the property sector, are in such weak shape that there is limited willingness by Beijing to push these through aggressively.”

“I think for now, the emphasis from fiscal policy is more on transfers from the central government to local governments, with the central government stepping up in terms of doing more borrowing to fill the gap from local governments, while the tax reforms will happen on a medium-term trajectory.”

The US-China-Russia Strategic Triangle

Neil Thomas asked: “Is Beijing concerned that Trump seems to be driving a wedge between China and Russia? He’s catering to Russia in the Ukraine war and helping, reportedly, the US to negotiate with Iran. Do you see this as being a reverse Kissinger in action? Will China be next in terms of the target of US-Russia relations?”

Guoguang Wu replied: “Good question. I think Beijing is much concerned with that. But I don’t think there is a huge possibility of a reversed Kissinger scenario, because in the early 1970s, the Soviet Union posed a direct and huge military threat to China. That was a major motivation for Mao Zedong and China to welcome Nixon to Beijing.”

Russia-China Relations and Strategic Triangle

GUOGUANG WU: Today, China doesn’t pose any military threat, any direct threat to Russia. So Russia has no such powerful motivation to break up, break down with Beijing to make friends with United States. And also, in economic connections, China and Russia, they are highly complementary with each other. So I think Russia needs China’s economic connections. And also very importantly, I don’t see any fundamental differences between Moscow and Beijing in terms of political values or ideology.

So we know that that was a major factor, I mean, ideological confrontation, that was major factor driving Moscow and Beijing apart from each other, eventually leading to the so called strategic triangle in early 1970s.

There’s a lot of reason to worry about that. Make sure to let the GM be, okay, so you don’t need to worry so much. But if Moscow tried to use this opportunity to lift a tape to deal with the Beijing, that’s reasonable. They don’t have full trust with each other.

So they also have small game to deal with each other, to try to gain advantage in dealing with each other. At this moment, with Trump’s policy toward Russia, it seems that Moscow really gains advantage if they like to use this to deal with the Beijing. But they know that, okay, so they need Beijing to be a major chip to deal with Washington DC also.

So in this sense we really see some kind of a strategic triangle but I don’t think this strategic triangle is actively equal distance among three poles, actually. The distance between Moscow and Beijing is the shortest. That means they are close to each other. So they have problems with each other, but basically, I don’t think their alliance can be dissolved accurately.

NEIL THOMAS: Yeah. And that’s a fascinating perspective. So it is a strategic triangle, but each side is a very different length depending on which partnership you’re talking about.

China’s Deflation Concerns

Just pivoting the conversation back to the economy, there’s a great question that’s come in about deflation in China, which has obviously been a major policy concern, both at home and abroad over the past couple of years. So the question specifically is how much of the deflationary pressure we’re seeing is driven by this Neidron phenomenon that Lizzi briefly discussed earlier. So, Neidron, obviously, this kind of intense competition that produces decreasing returns.

So, Lizzi, maybe if you want to take this, then it’d be great to get your thoughts, Michael, on the neutron phenomenon contributing to deflation. Perhaps also more broadly, what’s your feeling about the outlook for price levels in China going forward this year?

LIZZI C. LEE: Right. And I think it’s a critical question. And in fact, if you look at the government work report, there are two severe issues Li Keqiang pointed out. One is lack of consumption basically, low level of consumption. And the second is price pressure.

This is definitely top of Beijing’s concerns. In terms of how much of it is related to price wars, I wouldn’t say it’s a huge contributor. What’s really contributing to this sort of downslide of high cycle will show the lack of economic activities. So several things, I think we sort of pointed out earlier in our conversation.

First, there has to be a major, major boost in consumption, probably not just from the product sector, but also from the service sector. If you look at the provincial two session conference, every single one of the thirty-one provinces had some new policy initiatives to boost the service sector. So whether it’s attracting more cultural events, sporting events, tourism, exchanging service product offerings, etcetera, I think service is going to be a major watch point for how to actually boost consumption. When we think of a boost in consumption in the U.S., we think of handing out a check. But that’s definitely not the kind of approach Beijing is going for.

It’s more about the offering, expanding the diversity of product offerings and upgrading to expand what’s available in the market. I think that’s quite important. And there’s a lot of potential in terms of China’s service sector. There’s a lot of room for expansion. So that’s that.

And also, a depressed asset price contributing to deflationary pressure, which I think is why, as I mentioned, property market price and stock market price are explicitly framed as new policy variables. So I think we’re going to see a lot of movements in terms of policy regulations, new policy initiatives coming from those two sectors because asset prices, important wealth effect. China’s property sector, we don’t expect it to return to the go-go days, but definitely, it’s still a substantial part of household wealth and I think we will see some real movement there.

MICHAEL HIRSON: Yes. I think that’s a great point. I don’t think it’s really about the Neidron excess capacity. It’s more the underlying weakness of domestic demand. I think this issue is really where you get to the gap between Beijing’s desire to keep growth up at a fairly higher rate and the amount of oomph, the amount of stimulus backing behind it.

I would say my sense of where most economists are within China is that deflation is where policy needs to be more bold, and where incrementalism doesn’t get you out of some of the vicious cycles that happen once deflation takes hold. So I think it’s going to be a real challenge this year, this all of what we discussed, this higher growth target, somewhat higher fiscal spending, a pledge to be more proactive. Deflation may be kind of where the rubber meets the road on this.

But I would say thus far, I haven’t seen signals that the policy response is strong enough to really decisively break out of the deflationary debt.

Looking Ahead: Future Outlook

NEIL THOMAS: Great. Thank you. So we’re heading towards the top of the hour. So we’ve covered a lot today, from economic policy to elite politics to US-China relations.

But as we wrap up, I’d like to ask each panelist just a lightning round question, your very brief responses. So the question is, in one year’s time, at the next two sessions, do you think the overall vibe about China and the Chinese economy will be more optimistic or more pessimistic than it is today? And very briefly, why? So let’s just go Michael, Lizzi, and Guoguang, and then we’ll wrap up.

MICHAEL HIRSON: I think probably more optimistic, marginally, at least. And it’s probably because by that point, we may have seen the property sector repair, you know, come a little bit further in terms of its repair job. And I think hopefully Beijing is also continuing this more proactive policy footing.

LIZZI C. LEE: Yes. I’m also cautiously optimistic, not because the policy is now so far any real highlights to it, but I think there’s a real urgency, there’s a recognition of the severity of the problem there. And once, you know, we know once the leadership realizes there’s something wrong, once they decide to pivot, they can act really fast, which is another feature of the system itself. So cautiously optimistic at this point.

GUOGUANG WU: I think the biggest uncertainty will come from US-China trade war. So it depends on what kind of a tariff US would post over Chinese goods. So if that’s really, really harsh, I would not be so optimistic. But if that’s not in that way, yeah, I’ll agree with my colleagues.

NEIL THOMAS: Well, thank you all for a great discussion, and thanks to everyone in the audience for joining us. For more analysis on the two sessions and other critical issues about China, please visit the Center for China Analysis website with the Asia Society, and we hope to see you all at our next events. Goodbye. Have a good day.

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