(Bloomberg) -- China’s big annual policy report shows it may have to play nice with the US this year to counter its economic headwinds, though ambitions to ramp up tech investment and military spending signal tensions won’t go away.

Key goals outlined by Beijing on Tuesday ranged from countering Washington-led efforts to curb Chinese tech advancements to boosting defense expenditure — illustrating ongoing competition between the world’s two largest economies. Still, the need for cooperation was also present as Premier Li Qiang stressed officials will ensure foreign trade and investment is “overall stable.”

“We can expect Beijing to maintain its non-adversarial relationship with Washington for now” given its economic challenges, said James Char, a research fellow at Nanyang Technological University in Singapore. He added that only by doing so will Beijing “stand a chance of winning back investor confidence and reverse the trend of foreign capital exiting the country en masse.”

Here’s a closer look at what China’s work report means for the US: 

Tech and Trade

China’s work report pledged to harness national resources to speed up breakthroughs in science and tech. President Xi Jinping has long pushed for self-reliance in technology, a goal made all the more important as the US and its allies seek to curb China’s ambitions in semiconductors, electric vehicles and artificial intelligence.

Washington’s crackdown on the export of advanced tech to China has limited access to cutting-edge chips that can develop AI models. Bloomberg News reported this week that Advanced Micro Devices Inc. has been barred from selling an AI chip it tailored for the Chinese market, with Washington deeming it still too powerful.

Beijing on Tuesday also vowed “to prevent overcapacity” in some key industries as companies suffer from squeezed profit margins after cutting prices to remain competitive.

China’s leaders are pouring money into manufacturing as it looks for new growth drivers to offset losses from the beleaguered real estate sector. That’s meant more spending for electric vehicles, batteries and renewable energy — though it’s also fueled imbalances that may renew global trade tensions between China and developed countries.

Foreign Access 

Li promised in his speech to parliament to “take targeted steps to address prominent problems” that prevent foreign companies from operating in China or which hinder overseas investment. He cited measures to allow firms to participate on “equal footing” with local ones in government procurement and bidding, issues that have been repeatedly raised by visiting US and European officials.

US and other foreign companies have grown pessimistic on China in recent years as economic growth slows and geopolitical tensions rise. Direct investment into the nation by overseas businesses slumped to a 30-year low in 2023. Profits of foreign industrial firms in China dropped 6.7% last year from 2022.

There are some early signs of improvement. The head of the US Chamber of Commerce visited the country late last month, and a recent survey by the American Chamber of Commerce in China showed firms are optimistic about their profit potential.

“We are encouraged by the announcement of reforms that will level the playing field for foreign and local investors,” AmCham China Chair Sean Stein said Tuesday. “But announcements don’t move markets and promises don’t drive investment. The key, as ever, will be full and timely implementation.”

Taiwan Tensions

Li stuck to China’s typical rhetoric on Taiwan, saying Beijing will resolutely “oppose” independence. He also said his country “will promote the peaceful development of cross-strait relations, be firm in advancing the cause of China’s reunification and uphold the fundamental interests of the Chinese nation,” phrasing largely in line with prior remarks.

US-China tensions continue to simmer over the democratically run island. Meetings between Taiwanese President Tsai Ing-wen and top US lawmakers in 2022 led China to hold major military exercises in the Taiwan Strait, with strains only easing after US President Joe Biden and Xi met in San Francisco late last year.

Last week, China’s state-run Global Times newspaper said the expected increase in the defense budget was warranted, pointing to tensions in the South China Sea and the Taiwan Strait.

Military Spending

China said its defense spending will grow by 7.2% to 1.67 trillion yuan ($232 billion) in 2024, the biggest increase in five years. That comes after Biden last year signed a $886 billion defense bill that included funding for countries in the Indo-Pacific region to counter Chinese influence.

The fact that spending seems to be outpacing economic growth also indicates the “growing concerns that Beijing has about the external environment,” said Drew Thompson, a former Pentagon official and a senior fellow at the Lee Kuan Yew School of Public Policy in Singapore. He added that the People’s Liberation Army will likely have “more resources to use military coercion against countries on its periphery.”

Even if funding is directed at people, rather than weapons or equipment, that shouldn’t reassure the US, according to Oriana Skylar Mastro, center fellow at Stanford University’s Freeman Spogli Institute for International Studies. That’s because personnel is the military’s “number one limitation” which is cautioning China against using force, she said.

Economic Concerns

Li acknowledged that China’s ambitious economic growth goal of around 5% for 2024 is “not easy,” adding in his speech that “we need policy support and joint efforts from all fronts.”

There’s still plenty of uncertainty around the nation’s trajectory for this year. Stimulus is still fairly modest, with Beijing unveiling plans for special central debt on Tuesday but still keeping its headline fiscal deficit at last year’s 3% target.

“If you’re an American looking to invest in China, the key question is: Are consumers going to rebound? And it’s really ambiguous,” said Joseph Peissel, economic analyst at consultancy Trivium China.

What Bloomberg Economics Says... 

“Chinese Premier Li Qiang’s first budget indicates a strong commitment to growth. The 5% target for 2024 sets a high bar, given a more challenging base than last year — hitting it will require more stimulus. The stronger-than-expected budget plan is consistent with the ambitious goal.”

— Chang Shu, David Qu and Eric Zhu, economists

Read the full report here.

The prioritization of longer-term economic restructuring over shorter-term growth also means that “China is likely to continue to export disinflation this year,” according to Duncan Wrigley, chief China economist at Pantheon Macroeconomics. While Beijing is targeting 3% inflation this year, Chinese consumer prices are in a severe deflation streak.

Even though Chinese goods make up a small share of consumer prices in the US, the disinflationary trend could be welcomed by the Federal Reserve. The central bank is charting a path toward cutting interest rates, though US consumer prices have proved stubborn.

--With assistance from Lucille Liu, Jing Li and Jill Disis.

©2024 Bloomberg L.P.