China has a plan, and it’s working

The “two sessions” in early March – the National People’s Congress and the Chinese People’s Political Consultative Conference – took no macroeconomic action of significance, to the consternation of pundits who expected dramatic action from Beijing in the form of monetary ease, or consumption stimulus, or a property bailout.

China’s leadership focused single-mindedly on the transformation of Chinese industry through new technologies. It asks for and will give no quarter to America’s technology blockade, relying on an “all-country effort” to achieve self-sufficiency in semiconductors and other key technologies.

Among other measures, it added another US$27 billion for a semiconductor industry fund to its already massive commitment and announced a 10% increase in the national science budget.

The divergence of views about China’s economy at home and abroad couldn’t be more pronounced.

The Center for Strategic and International Studies, the epicenter of conventional wisdom, wrote on February 29 that “China’s economy is showing multiple signs of weakness. Actual growth seems below the official figures; there is substantial deflation; the housing market has yet to stabilize; and the domestic stock markets have fallen significantly.”

Beijing, by contrast, has little interest in the obsession of Western macroeconomists with demand management and focuses on industrial policy.

A few important data reports since the “two sessions” ended favor Beijing’s benign view of China’s economic circumstances. Contrary to the deflation meme, China’s core consumer price index showed a 1.2% year-on-year rise in February following a 0.4% rise in January. Core CPI excludes volatile food prices, which dragged the headline CPI number into negative