China announced its lowest economic growth target in more than 20 years. Now, following lifting strict epidemic prevention measures that lasted three years, China faces dual challenges in the domestic and global economies.
The target for gross domestic product growth of around 5 percent this year, announced by Premier Li Keqiang at the opening session of the National People’s Congress on Sunday, suggests officials are not chasing excessive growth and are turning their attention to other priorities .
At the NPC meeting, Chinese leader Xi Jinping is expected to further consolidate his grip on security, finance and technology, realigning key positions to further downplay the government’s role in policymaking and strengthen the Communist Party leadership.
This year’s growth target is more conservative than the roughly 5.5% target set by the Chinese government last year — when the world’s second-largest economy fell well short of growth targets last year, dragged down by Xi Jinping’s strict anti-epidemic controls and a persistent housing slump . Last year’s 3% real growth rate was the slowest in decades, with the exception of 2020, when the new crown epidemic hit, when officials chose to abandon the growth target.
Li Keqiang said in the government work report that this year, economic stability must be given top priority, and progress must be pursued while ensuring stability. This is his last government work report before stepping down.
The emphasis on stabilizing the economy follows a three-year dynamic zero-out policy, when containing the outbreak overwhelmed all other priorities, including support for the economy. If China’s economy can steadily improve following lifting the restrictions related to the new crown epidemic, China can get back on track and eventually surpass the United States to become the world’s largest economy. The outlook is increasingly doubtful.
Achieving growth of around 5% this year would mean that China’s economy will grow at an average rate of regarding 4.6% over the four-year period from 2020 to 2023, down a notch from the average growth rate of 6.7% between 2015 and 2019.
In the short term, the relatively conservative 5% growth target suggests that policymakers are concerned regarding a litany of challenges that might slow the recovery even as containment measures related to the outbreak are lifted—headwinds include: tepid Fiery business and consumer confidence, weak overseas demand for Chinese-made goods, and local governments’ ability to stimulate the economy due to heavy debts.
Louise Loo, a China economist at Oxford Economics in Singapore, said the 5 percent target was particularly cautious given the strong pickup in business activity in the first two months of the year. Both official and private measures of Chinese manufacturing, services and construction activity rebounded strongly in January and February.
“Today’s report suggests that the Chinese government believes that the boost to growth from reopening may only be temporary,” Lo said. “The policy direction is to achieve the 5% growth target with only limited stimulus.”
Li Keqiang said on Sunday that the government will increase fiscal spending by 5.6 percent this year, lower than last year’s increase, while fiscal revenue is expected to rise 6.7 percent this year, higher than last year’s level. Officials are targeting a fiscal deficit of 3% for 2023, slightly higher than the 2.8% for 2022 – a sign Beijing is unlikely to boost the economy aggressively.
A big question this year is how far growth in China’s exports will slow following propping up the country’s economy through much of the pandemic. China’s export growth began to slow year-on-year and fell in October following consumers and businesses in Western countries cut spending as the central bank aggressively curbed inflation.
China is due to release trade data for the first two months of the year on Tuesday. Shipping costs at Chinese ports have plummeted in recent weeks, with a flood of empty containers suggesting trade demand remains subdued, analysts said.
Goldman economists told clients in a note on March 2 that “if exports are much weaker than we expect, policymakers may need to introduce monetary or fiscal easing once more and an infrastructure push.”
Another key factor affecting China’s overall recovery is the sustainability of any post-epidemic rebound in consumer spending.
Economists are watching how Chinese households will spend the excess savings they have amassed during the pandemic, although some believe lingering uncertainty will dampen people’s desire to spend.
While Li Keqiang called on the government to “stabilize bulk consumption and promote the recovery of life service consumption”, he made no mention of handing out cash, a practice widely used by many Western economies to stimulate consumption during the pandemic.
Instead, Li Keqiang called for raising people’s income levels to encourage consumption, without elaborating. Officially, youth unemployment in China’s urban areas remains high following peaking at nearly 20 percent last year. Migrant workers face heightened job insecurity as export demand falters and factories may suspend hiring.
Officials on Sunday signaled little new support for the struggling real estate sector. The property market has been in the doldrums since late 2020 when regulators began to strictly enforce lending restrictions on property developers.
The government work report calls for support for first-time homebuyers, new urban residents and young people. However, the report also reiterated the mantra that Xi and other officials have chanted in their campaign to curb soaring housing prices, namely that “houses are for living in, not for speculation.”
That suggests that while real estate may get some support from regulators this year, it may not get the chance to regain its past role as a major growth engine.
The overall cautious tone in the government work report reflects China’s continued emphasis on fiscal integrity – which began before the pandemic.
“Beijing will prioritize fiscal sustainability this year,” said Song Houze, a fellow at the Paulson Institute in Chicago.
To that end, the Chinese government sent a modest signal of support to local governments on Sunday. Local government debt has ballooned as the ongoing housing downturn has hit land auctions as the epidemic has generated massive spending. Previously, land auctions were the main source of revenue for local governments.
This year, fiscal transfer payments from the central government to local governments will increase by 3.6 percent to 10.06 trillion yuan, a far cry from last year’s 18 percent increase.
The Chinese government will allow local governments to issue 3.8 trillion yuan ($550 billion) worth of special local government bonds, mostly to fund infrastructure projects, down from 4.04 trillion yuan last year.
Beyond the goals outlined in Sunday’s government work report, the performance of China’s economy will depend on whether a leadership team of Mr. Xi’s cronies can revive the confidence of ordinary households and private businesses.
“The challenge for governments is how to support the private sector, which is critical to improving employment and productivity growth,” said Eswar Prasad, a professor of trade policy at Cornell University.
Original report:
Chinese government work report
Economic and Social Development Program
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Highlights of the Chinese government work report
China’s Ministry of Finance: This year’s deficit rate is set at 3%, an increase of 0.2 percentage points from the previous year; special bonds increased to 3.8 trillion yuan