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China's modest GDP growth target reduces need for more stimulus

Bloomberg
Bloomberg • 6 min read
China's modest GDP growth target reduces need for more stimulus
China set a modest economic growth target of around 5% for the year, with the nation’s top leaders avoiding any large stimulus to boost a recovery. Photo: Bloomberg
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China set a modest economic growth target of around 5% for the year, with the nation’s top leaders avoiding any large stimulus to spur a consumer-driven recovery already underway, suggesting less of a growth boost to an ailing world economy.

Premier Li Keqiang announced the goal for gross domestic product in his final report to the Communist Party-controlled parliament, which kicked off its annual meeting on Sunday. Economists had expected a more ambitious target of above 5% following a rebound in consumer and business spending after the end of coronavirus restrictions.

Having missed the GDP goal last year by a wide margin for the first time ever, a more cautious aim this year could restore Beijing’s credibility and give President Xi Jinping and a line up of new top economic officials more room to focus on long-term policies.

Beijing’s reliance on consumers to drive the economy and reluctance to juice growth through commodity-intensive sectors like real estate and infrastructure means “the positive spillover effect, compared with China’s rebound cycles in the past, will somewhat decline,” said Jacqueline Rong, deputy chief China economist at BNP Paribas SA.

For global central bankers battling soaring prices, China’s more muted growth outlook may help ease inflation worries. A series of strong reports on US jobs, prices and consumption prompted some Federal Reserve policymakers to consider raising interest rates several more times. All eyes will be on Fed Chair Jerome Powell’s testimony to lawmakers this week to see if he’ll echo those views.

Equity gauges in China underperformed the broader Asian market on Monday, the first day of trading after the growth target was announced. The onshore benchmark CSI 300 Index ended 0.5% lower while the Hang Seng China Enterprises Index, a gauge of Chinese stocks traded in Hong Kong, closed little changed. Commodities from iron ore to oil dropped.

See also: Collateral damage for China investors

Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd., said the GDP goal “should be taken as a floor,” implying actual growth could overshoot the target. “Because the Covid policy has been adjusted, there’s no urgency for them to run another round of big economic stimulus,” he said.

Growth of 5% is still higher than the government’s reported 3% expansion last year, and will give the global economy some support. The International Monetary Fund estimates that when China’s GDP growth rate rises by 1 percentage point, the pace in other countries increases by around 0.3 percentage points.

See also: Politics complicating China businesses, investments

It’s likely growth will exceed the target. UBS Group AG on Monday raised its growth forecast for 2023 to 5.4% from 4.9%. A former central bank official also said his analysis of provincial GDP targets suggests the economy as a whole will expand about 5.6%.

This year’s parliament meeting marks the last for Li, who is likely to be replaced by Xi ally Li Qiang, already the ruling party’s No. 2, as part of the biggest reshuffle of China’s economic policy team in a decade. Premier Li bowed deeply to the audience in Beijing’s cavernous Great Hall of the People before reading his report.

Li said boosting domestic demand, a reference to consumer spending and business investment, would be the government’s top priority this year, while imports and exports would steadily increase. The government’s higher employment target for this year — of around 12 million new urban jobs — suggests that officials see more labour-intensive consumer sectors driving the economy, while the growth of government-funded infrastructure investment is likely to slow.

“A rebound in consumption is most likely to lead growth,” said Bert Hofman, a former China country director at the World Bank. “Business investment may remain on the fence until stronger measures to support the private sector become apparent.”

The national budget released on Sunday suggests fiscal support will be restrained. The target for the headline deficit — based on a narrow definition of government revenue and spending — was raised to 3% of GDP for this year from 2.8% last year.

However, local governments are likely to scale back major investments, with a smaller quota for special local bonds, used mainly to finance infrastructure projects.

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“If infrastructure growth turns out to be slow, it might impact industries like steel and cement in other countries as well because China may import less commodities,” said Iris Pang, chief economist for Greater China at ING Bank.

National Security

Li’s report underlined a shift in Beijing’s outlook toward emphasizing national security, technological self-reliance and financial stability over the pace of growth. The premier called for a policy that can “balance development and security.”

Underscoring those objectives, China will boost its defence spending by 7.2% this year, the fastest pace in four years, to RMB1.55 trillion ($292.1 billion). Beijing will also aim for “peaceful reunification” with Taiwan, Li said, maintaining its previous stance toward the island.


What Bloomberg Economics Says...



Premier Li Keqiang has delivered a conservative growth goal for 2023, combined with a supportive spending plan. The pairing – announced on the first day of the National People’s Congress — probably reflects the government’s determination to hit its target after missing by a wide margin in 2022. The modest growth goal also suggests a desire to avoid over-stimulating the economy and accumulating too much more debt – concerns that linger after an over-done response to the Great Financial Crisis.


Chang Shu and David Qu

Science and industrial policy was second on Li’s list of government priorities, with officials aiming to co-ordinate businesses to achieve breakthroughs in core technology to boost “self-reliance and self-strengthening,” he said. The issue has gained urgency in Beijing after Washington imposed unprecedented sanctions on China’s microchip sector last year.

The target “gives the message that growth is important but we also have other objectives such as developmental and financial stability considerations,” said Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings. The People’s Bank of China last week vowed to refrain from using “flood-style” stimulus, likely meaning aggressive interest rate cuts are off the table this year.

Property Regulation

On China’s property market, which drives as much as 20% of China’s GDP, Li hinted that Beijing will continue to support housing while also regulating the sector more tightly, saying the government wants to prevent “unregulated expansion of the market.”

He also vowed to support privately-owned businesses, encourage foreign investment and “boost market expectations and confidence” — a pledge that may appease investors after confidence plummeted last year following repeated Covid lockdowns and the fallout from unpredictable regulatory crackdowns on sectors such as education, internet platforms and real estate.

The report offered little detail on how Beijing will respond to some of the biggest challenges facing China and the world in the coming year, such as the pandemic and Russia’s invasion of Ukraine.

“As a responsible major country, China played significant and constructive roles in enhancing international Covid-19 cooperation and addressing global challenges and regional hotspot issues,” Li said without naming the issues he was referring to.

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