China says its economy will expand about 5%, a cautious target

The days of routine annual growth of 8% to 10% are over, most economists believe

China set a modest economic growth target of around 5 per cent for the year, with the nation’s top leaders avoiding any large stimulus to boost a recovery still being weighed down by weak business confidence and an uncertain property market.

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 per cent following a rebound in consumer and business spending after the end of coronavirus restrictions.

The goal “should be taken as a floor of growth the government is willing to tolerate,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd. “Because the Covid policy has been adjusted, there’s no urgency for them to run another round of big economic stimulus.”

Having missed the GDP goal last year by a wide margin, a more cautious outlook this year would restore credibility around the target and give President Xi Jinping and his new economic officials more policy room to focus on key objectives. Financial markets, though, may be disappointed by the more subdued outlook after rallying last week on signs of a stronger-than-expected rebound in the economy.

“While the official growth target has been lowered for the second consecutive year, which might be a disappointment to the market, we reckon investors will pay attention to the underlying growth momentum to gauge the recovery,” said Zhou Hao, chief economist at Guotai Junan International Holdings. “The new cabinet is likely to overshoot the growth target whenever possible.”

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 labor-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.”

Credit: Bloomberg

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 per cent of GDP for this year from 2.8 per cent 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. That would have implications for the construction sector and knock-on effects for global commodity prices.

“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 emphasising national security, technological self-reliance and financial stability over the pace of growth. The premier called for policy that can “balance development and security.”

Underscoring those objectives, China will boost its defense spending by 7.2 per cent this year, the fastest pace in four years, to 1.55 trillion yuan. 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.

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 per cent 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.

China’s economic rebound this year has been off to a solid start. A gauge of manufacturing momentum in February rose to its highest level in more than a decade while traffic congestion in major cities has recovered strongly. But a sustained economic rebound is far from certain.

Export demand continues to languish as the US and European economies struggle, while the property market has yet to fully stabilize. Also key to the outlook will be how quickly business and consumer confidence can bounce back, with continued US-China tensions over technology and geopolitics complicating the outlook.

“The authorities see the downside risks clearly existing for the Chinese economy,” Guotai’s Zhou said.