BEIJING – In March 2022, the Chinese government set a target of 5-5.5% GDP growth for the year. At the time, such growth levels appeared perfectly attainable. But within a month, the Omicron variant had arrived, triggering strict lockdowns that, while stemming the spread of the coronavirus, caused serious damage to the supply and demand sides of the economy. China’s growth rate for 2022 was just 3%.

Today, however, things are looking up for China’s economy. Following the government’s rapid shift away from its zero-COVID policy in December – and especially since the middle of last month – the economy has sprung back to life. This renewed vitality was on display during the Spring Festival holiday in late January, when more than 300 million Chinese hit the road, up 23% from last year.

There are good reasons to expect significantly higher growth in 2023. For starters, the headline rate will reflect the low base in 2022. Given 4.8% average GDP growth in 2019-22, a back-of-the-envelope calculation suggests that China should be able to achieve GDP growth of around 6% in 2023.

Moreover, China still has ample room for expansionary monetary and fiscal policy. In the monetary realm, there is space to lower both the reserve requirement for banks and policy interest rates, such as the seven-day reverse repo rate and the medium-term lending facility.

As for fiscal policy, there are widespread – and legitimate – concerns about China’s high leverage ratio. But the government’s debt-to-GDP ratio remains significantly lower than in most advanced economies. Add to that China’s faster GDP growth and high savings rate, and it is clear that China’s fiscal position is much stronger than in most developed countries.

The question is how to direct the available policy support. Given the grim global outlook, exports cannot be expected to be a major driver of growth this year, despite making an important contribution to growth in 2022. Consumer demand can support growth, if it recovers strongly: in 2022, final consumption in China contributed just 32.8% to GDP growth, despite accounting for some 55% of GDP. But the likely impact of direct measures to stimulate consumer demand remains unclear.

Where expansionary fiscal policy would be useful is in supporting investment. While investment’s contribution to GDP growth has decreased significantly since 2010, it was the main engine of it in 2022. Yes, real-estate investment declined by 10%. But investment in manufacturing and infrastructure rose by 9.1% and 9.4%, respectively.

China’s best hope for the real-estate sector in 2023 is that investment stabilizes, while manufacturing investment will be decided mainly by market forces related to industrial and technological development. But infrastructure investment merits fiscal support.

Some economists have argued that China already suffers from excessive infrastructure investment, citing massive waste and white elephants. But while they are right that China has made inefficient investments, the country’s infrastructure needs have not been met. For example, the pandemic highlighted weaknesses in China’s public-health infrastructure. More broadly, compared to developed countries, China’s (per capita) infrastructure gap is huge. So, infrastructure investment is still badly needed; it simply must be better targeted.

Of course, another black swan event like the pandemic could thwart China’s aspirations for growth in 2023. A more likely impediment is an increase in inflation, as has occurred in much of the rest of the world.

Over the last decade, China’s inflation rate has been very low, with the consumer price index averaging less than 2%. But the pandemic has dealt a major blow to China’s production capacity, and repairing supply chains and eliminating production bottlenecks may take time. As a result, supply may not be able to keep up with the surge in demand that accompanies reopening. The resulting imbalance will cause inflation to rise this year, at least for a while.

Higher inflation will hamper the government’s ability to implement expansionary fiscal and monetary policy. But the policy priority must be to stabilize growth, so China may well need to tolerate an inflation rate higher than 2-3%. Striking the right balance between growth and price stability may well prove to be a key challenge for China’s government this year.

Fiscal and monetary expansion cannot fix China’s structural problems. What it can do is create space for China to implement the comprehensive reform program set forth at the 18th National Congress of the Communist Party of China in 2012. That program called on the government to “encourage, support, and guide the development of the non-public sector”; “improve the property-rights protection system”; establish the basis “for the market to play a decisive role in the allocation of resources”; “put in place a modern market system in which enterprises enjoy independent management and fair competition”; and “build a law-based and service-oriented government.”

The government must act fast, given the possibility that its space for macroeconomic expansion will shrink as CPI inflation rises and other potential constraints take hold. If China’s leaders make optimal use of fiscal and monetary policy, and unswervingly pursue reform and opening up, they can ensure that 2023 is a very good year.

SHANGHAI – After Chinese GDP grew by only 3% in 2022, one would have expected the government to set a growth target of at least 6% for this year. In fact, virtually no market forecast projects a lower rate. Yet, at last month’s National People’s Congress, outgoing Premier Li Keqiang revealed in his final Government Work Report that the government was aiming for growth of about 5%, the lowest target of his tenure.

Under former Premier Wen Jiabao, from 2003 to 2013, China maintained an official growth target of 8%. But, in his final Government Work Report, Wen lowered the target for the first time, by 0.5 percentage points. The reason was obvious: Wen wanted to help cool the then-overheated economy. Surprisingly, Wen’s successor, Li, effectively treated 7.5% as a ceiling for growth during his ten-year term.

In fact, since 2014, Premier Li has consistently revised China’s growth target a half-point downward from the previous year’s target, whether through a categorical adjustment or the introduction of a lower range. With GDP growth repeatedly falling short of the official target, one cannot help but assume that this was a response to the economy’s actual performance. If existing targets are not being met, why would the government raise them?

Over the past three decades, growth targets have, to some extent, become a self-fulfilling prophecy. From 1993 to 2013, the central government’s growth target was practically interpreted as an indication of what the central government hoped for. That’s why the actual rate of growth was much higher than the government targets. Yes, there were structural forces working in China’s favor during this period. Local governments faced political incentives to implement their growth strategies – including fixed-asset investment and industrial planning – to meet the central government’s priorities and expectations.

Just as rising growth targets encourage local governments to pursue growth more aggressively, falling growth targets can discourage such efforts, leading to lower growth rates that, in turn, spur the government to reduce targets further, causing a downward spiral. All of this makes it difficult to estimate China’s potential rate of growth, which is supposed to be what anchors economic policy. Why did that happen?

China’s slowing GDP growth over the past decade is a reflection not of flawed policy, but of a new policy approach. From 1993 to about 2013, GDP growth was the central government’s primary objective and guided policymakers’ approach to macroeconomic management. This objective – which local governments were tasked with realizing – led to the acceleration of public capital formation, improvements in the investment environment, the crowding in of private capital, and the creation of more productive capacity.

This approach, however, also has its limits, resulting from rapidly increasing marginal costs. While productive investment fuels growth and development, excessive investment leads to diminishing returns and rising debts. The growth-first approach also caused considerable environmental damage, including pollution of China’s air and waters.

The immediate social costs associated with this approach finally pushed China’s government to opt for a new strategy, centered on creating jobs and ensuring macroeconomic stability. On the employment front, China has already achieved considerable success: over the last decade, urban job creation has stood at around 12 million (or more) annually, far exceeding the target – more binding than the GDP target – of 11 million.

China owes these gains largely to rapid progress in high-tech sectors like the platform economy and electric vehicles. New digital technologies have supported rapid growth in the service sector, and bolstered resilience in the labor market more broadly.

If the economy can produce enough jobs, ever-accelerating GDP growth is simply not necessary. Even as GDP growth has plummeted to about half the annual average (10.2%) in 2002-12, China has not experienced significant social unrest. Nor has there been a financial crisis or a sharp economic contraction that reverses past progress on living standards, despite the pandemic-induced slump.

China will continue to reap the benefits of its shift from growth-centric policymaking to a focus on jobs. This approach is more conducive to the implementation of structural reforms needed to limit excess investment and reduce debts. It should also spur the adoption of new technologies, generating a virtuous cycle of job creation and productivity growth. Progress in these areas – as well as the convergence of productivity-growth rates across regions – is crucial for the Chinese economy’s medium- to long-term development.

An unfavorable external environment further strengthens the case for China to look beyond growth. The entire global economy is grappling with declining productivity growth and falling demand – trends that will not be reversed any time soon.

Moreover, we are witnessing the collapse of the institutional framework that has underpinned capital-account liberalization worldwide over the last 30 years, as geopolitical tensions lead to an unprecedented surge in cross-border restrictions. More broadly, geopolitics-driven economic policies – not least restrictions imposed on trade with China by the United States – are generating considerable uncertainty in global supply chains and financial markets.

The era of high growth and low inflation is over in the advanced economies and is being succeeded by the “secular stagnation” of which former US Treasury Secretary Lawrence H. Summers has long warned. In this context, emerging-market economies like China are right to abandon the illusion that high growth can be maintained indefinitely. The more likely scenario is a long period – lasting perhaps a decade – of slower growth. China is far better off focusing on employment and working to avoid a systemic financial or debt crisis than attempting to resist the inevitable.

CHICAGO – In March, a group of United States senators introduced the bipartisan Protecting America’s Agricultural Land from Foreign Harm Act, which would prohibit any entity “owned by, controlled by, or subject to the jurisdiction or direction of a foreign adversary” from leasing or purchasing public and private US farmlands.

Although the term “foreign adversaries” refers to four countries – Iran, North Korea, China, and Russia – it is clear that China is the real target. Introduced amid heightened fears of Chinese espionage after the downing of a Chinese surveillance balloon over US territorial waters in February, the bill follows a series of large land purchases near American military bases by entities allegedly associated with China’s government. It also follows similar restrictions on foreign ownership of farmland passed by 14 state legislatures over the past few years.

The proposed law aims to safeguard the US food supply and to ensure that agricultural land remains affordable to American farmers. These two goals are complementary: by protecting domestic farming, the argument goes, the US could enhance food security. But while these are worthy goals, it is doubtful that the senators’ bill could achieve them.

It is clearly in the interest of US national security to limit foreign ownership of land near strategic military and civilian facilities. But the Act would go beyond that, seeking to impose a blanket ban on ownership of agricultural land by anyone from the four specified countries (excluding US citizens and permanent residents).

While some US legislators fear that foreign owners could disrupt the US food supply by refusing to sell the their lands’ output to American consumers, these concerns are overblown. According to a comprehensive report by the US Department of Agriculture (USDA), foreign entities owned 3.1% of US agricultural land as of 2021. Of this total, 29% was cropland, implying that foreign entities own just 0.9% of all US cropland.

Moreover, the largest foreign owner of US agricultural land is Canada, hardly a hostile foreign power. According to the USDA, Canadians own 10% of all US cropland, or nearly 4.3 million acres. Italian entities are the second-largest foreign owners, with 4% of total US cropland, or nearly 1.7 million acres. China owns only 34,425 acres, or 0.08%, whereas Iran and Russia together own less than 1,250 acres. North Korea owns none.

To be sure, one could argue that the proposed ban seeks to preempt a future problem, as Chinese land ownership will surely grow if left unchecked. Even so, the best way to protect the integrity of the US food supply is to regulate how food is distributed. For example, the federal government could stipulate that a certain share of US produce must be sold to Americans. It could also require that cropland owned by foreign entities be used to grow food. These and other such regulations would fall within the existing policy framework, as the government already keeps track of agricultural land ownership and provides economic incentives to encourage production. But the current version of the bill contains no provisions regulating distribution.

While making agricultural land more affordable to US farmers by limiting foreign ownership may seem like a great idea on paper, the reality is more complicated. The 2021 USDA report found that foreign ownership had no effect on land prices – hardly a surprise, given that foreign-owned entities own a fraction of US farmland.

In fact, an increase in foreign ownership could have a net positive economic impact on US farmers. After all, land purchases lead to money transfers from foreign investors to American landowners. Foreign landowners must also pay state and municipal taxes that policymakers could then invest in local communities. In Texas, for example, where there is no state income tax, local property taxes make up more than half of tax revenues. Yet Texas strongly supports the proposed national ban on Chinese land ownership and is currently debating a similar bill backed by Governor Greg Abbott. If legislators really wanted to help American farmers, they would enforce taxes on foreign-owned property and ensure that the revenues are spent on encouraging agriculture.

The data show that the proposed legislation is unlikely to improve US food security or the well-being of American farmers. There are better, more effective ways to achieve these goals that are not being discussed. The primary purpose of the senators’ bill is political. For those behind it, the proposed ban is a low-cost way to capitalize on the escalating rivalry between the US and China. US lawmakers seem more concerned with grandstanding and fueling geopolitical tensions than they are with helping American food producers and consumers.

NEW YORK – I recently attended the China Development Forum (CDF) in Beijing, an annual gathering of senior foreign business leaders, academics, former policymakers, and top Chinese officials. This year’s conference was the first to be held in person since 2019, and it offered Western observers the opportunity to meet China’s new senior leadership, including new Premier Li Qiang.

The event also offered Li his first opportunity to engage with foreign representatives since taking office. While much has been said about Chinese President Xi Jinping appointing close loyalists to crucial positions within the Communist Party of China and the government, our discussions with Li and other high-ranking Chinese officials offered a more nuanced view of their policies and leadership style.

Prior to becoming premier in March, Li served as the CPC secretary in Shanghai. As an economic reformer and proponent of private entrepreneurship, he played a crucial role in convincing Tesla to build a mega-factory in the city. During the COVID-19 pandemic, he enforced Xi’s strict zero-COVID policy and oversaw a two-month lockdown of Shanghai.

Fortunately for Li, he was rewarded for his loyalty and not made into a scapegoat for the policy’s failure. His close relationship with Xi also enabled him to convince the Chinese president to reverse the zero-COVID restrictions overnight when the policy proved to be unsustainable. During our meeting, Li reiterated China’s commitment to “reform and opening up,” a message that other Chinese leaders also conveyed.

Li’s remarkable wit contrasted sharply with the more reserved demeanor of former Premier Li Keqiang, whom we met in earlier years when he was premier. During our meeting, he made Apple CEO Tim Cook laugh out loud by attributing his joyful mood to the viral video of Cook being applauded by crowds during his visit to an Apple store in Beijing. He even joked about a video of US lawmakers grilling TikTok CEO Shou Zi Chew, which had also gone viral that week. Unlike Cook, he noted, the beleaguered TikTok boss was not smiling during his congressional hearing. Li’s joke included an implicit warning that although US firms are still welcome in China, the Chinese government can play hardball if its firms and interests are treated harshly in the United States.

Li’s veiled threat captures the current Chinese attitude toward the US. Although senior economic policymakers in China often talk about opening up, China’s policies still prioritize security and control over reform. Qin Gang, China’s new foreign minister, adopted a hawkish stance during his CDF address. Taking an implicit swipe at the US, Qin warned Western attendees that while China aims to maintain an open global trading regime, the country would respond forcefully to any attempt to drag it into a new cold war.

In a recent speech, US Treasury Secretary Janet Yellen sought to alleviate China’s concerns that the US is trying to “contain” its rise and decouple from its economy. Recent American actions limiting trade with China, she clarified, were based on national-security concerns rather than an effort to hinder the country’s economic growth.

But assuaging China will be difficult when the US is reportedly planning to introduce far-reaching restrictions on Chinese investments in the US and on US investments in China. To date, Chinese officials have not been receptive to Yellen and Secretary of State Antony Blinken’s efforts to establish a dialogue on how to maximize cooperation, minimize areas of confrontation, and manage the two powers’ escalating strategic competition and rivalry.

European Commission President Ursula von der Leyen recently gave a similarly pragmatic speech in which she argued that Europe should “focus on de-risking rather than decoupling” from China but also emphasized the many ways in which Chinese policies pose a threat to Europe and the West. Her speech was not well-received in Beijing, and she was effectively snubbed when she visited China with French President Emmanuel Macron in April, while the more accommodating Macron received a red-carpet welcome.

China is currently trying to drive a wedge between the European Union and the US. Given that EU-based companies have significant interests in China, many European CEOs attended the CDF, in contrast to the limited presence of American business leaders. And Macron’s controversial comments during his visit in April, particularly his statement that Europe must not become a “vassal” of the US, suggested that the effort may have succeeded. But a subsequent G7 communiqué reaffirmed the West’s stance on Taiwan and condemned China’s aggressive policies toward the island, and China’s tacit support of Russia’s brutal invasion of Ukraine will likely deter Europe from succumbing to a charm offensive.

The run-up to the US presidential election, together with China’s suspicion that the US is trying to contain its economic growth, will impede efforts to build trust and de-escalate tensions between the two countries. With both Democrats and Republicans competing to be seen as tough on China, the Sino-American cold war is likely to intensify, raising the risk of an eventual hot war over Taiwan.

Despite US officials’ efforts to establish guardrails for strategic competition with China, and Chinese officials’ insistence that they have no interest in economic decoupling, prospects for cooperation look increasingly remote. Fragmentation and decoupling are becoming the new normal, the two countries remain on a collision course, and a dangerous deepening of the ongoing “geopolitical depression” is all but inevitable.

NEW HAVEN – Five years into a once-unthinkable trade war with China, US Treasury Secretary Janet Yellen chose her words carefully on April 20. In a wide-ranging speech, she reversed the terms of US engagement with China, prioritizing national-security concerns over economic considerations. That formally ended a 40-year emphasis on economics and trade as the anchor to the world’s most important bilateral relationship. Yellen’s stance on security was almost confrontational: “We will not compromise on these concerns, even when they force trade-offs with our economic interests.”

Yellen’s view is very much in line with the strident anti-China sentiment that has now gripped the United States. The “new Washington consensus,” as Financial Times columnist Edward Luce calls it, maintains that engagement was the original sin of the US-China relationship, because it gave China free rein to take advantage of America’s deal-focused naiveté. China’s accession to the World Trade Organization in 2001 gets top billing in this respect: the US opened its markets, but China purportedly broke its promise to become more like America. Engagement, according to this convoluted but widely accepted argument, opened the door to security risks and human-rights abuses. American officials are now determined to slam that door shut.

There is more to come. President Joe Biden is about to issue an executive order that will place restrictions on foreign direct investment (FDI) by US firms in certain “sensitive technologies” in China, such as artificial intelligence and quantum computing. The US rejects the Chinese allegation that these measures are aimed at stifling Chinese development. Like sanctions against the Chinese telecoms giant Huawei and those being considered against the social-media app TikTok, this one, too, is being justified under the amorphous guise of national security.

The US case rests not on hard evidence but on the presumption of nefarious intent tied to China’s dual-purpose military-civilian fusion. Yet the US struggles with its own security fusion – namely, the fuzzy distinction between America’s under-investment in innovation and the real and imagined threats of Chinese technology.

Significantly, Yellen’s speech put both superpowers on the same page. At the Communist Party’s 20th National Congress last October, Chinese President Xi Jinping’s opening message also stressed national security. With both countries equally fearful of the security threat that each poses to the other, the shift from engagement to confrontation is mutual.

Yellen is entirely correct in framing this shift as a tradeoff. But she only hinted at the economic consequences of conflict. Quantifying these consequences is not simple. But the American public deserves to know what is at stake when its leaders rethink a vitally important economic relationship. Some fascinating new research goes a long way toward addressing this issue.

A just-published study by the International Monetary Fund (summarized in the April 2023 World Economic Outlook) takes a first stab at identifying the costs. IMF economists view the problem through the lens of “slowbalization”: the reduction of cross-border flows of goods and capital, reflected in geostrategic strategies of “reshoring” (bringing offshore production back home) and what Yellen herself has called “friend-shoring” (shifting offshore production from adversaries to like-minded members of alliances).

Such actions result in “dual bloc” FDI fragmentation. The IMF estimates that the formation of a US bloc and a China bloc could reduce global output by as much as 2% over the longer term. As the world’s largest economy, America will account for a significant share of foregone output.

European Central Bank President Christine Lagarde recently stressed a different channel through which an escalating US-China conflict could adversely affect economic performance. Drawing on research by ECB staff, she focuses on the higher costs and inflation resulting from supply-chain disruptions implied by conflict-driven FDI fragmentation. The ECB study concludes that geostrategic conflict could boost inflation by as much as 5% in the short run and around 1% over the longer term. Collateral effects on monetary policy and financial stability would follow.

Collectively, these model-based calculations of the costs of conflict imply a stagflationary combination of lower output and higher inflation – hardly a trivial consideration in today’s fragile economic climate. And they dovetail with economic theory. Countries trade with others to reap the benefits of comparative advantage. Both inward and outward flows of foreign investment seek to achieve similar benefits, offering offshore efficiencies for multinational corporations that face higher costs in their home markets and attracting foreign capital to support domestic capacity expansion and job creation. Regardless of their different political systems and economic structures, this is true for both America and China. It follows that conflict will reduce these benefits.

Yet there is an important twist for the US: a chronic shortfall of domestic saving casts the economic consequences of conflict with China in a very different light. In 2022, net US saving – the depreciation-adjusted saving of households, businesses, and the government sector – fell to just 1.6% of national income, far below the longer-term 5.8% average from 1960 to 2020. Lacking in saving and wanting to invest and grow, the US takes full advantage of the dollar’s “exorbitant privilege” as the world’s dominant reserve currency and freely imports surplus saving from abroad, running a massive current-account and multilateral trade deficit to attract foreign capital.

As such, the economic interests of saving-short America are tightly aligned with its outsize imbalances of trade and capital flows. Barring a highly unlikely resurgence of domestic US saving, compromising those flows for any reason – say, security concerns over China – is not without meaningful economic and financial consequences. The research cited above suggests those consequences will take the form of slower economic growth, higher inflation, and possibly a weaker dollar.

This is hardly an ideal outcome for a US economy that is already at a precarious point in the business cycle. The tradeoff for national security should not be taken lightly. Nor should the US penchant to over-hype the security threat be accepted on blind faith.