BEIJING – China’s leaders are cautious about the country’s economic recovery prospects, after ending a Covid-19 ban on business activities late last year.
Beijing announced on Sunday a growth target of “around 5%” in gross domestic product for 2023, with only increased fiscal support.
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“The government’s conservative growth target of 5% for 2023 recognizes that China’s growth continues to face headwinds,” said Martin Petch, vice president and senior credit officer, Moody’s Investors Service, in a note. “These include the impact of slower global growth on China’s exports and risks associated with the property sector and local government debt.”
“The government’s only mild expansion in fiscal support and more targeted monetary measures show that long-term issues including leverage limits and financial stability remain important elements of the long-term policy mix,” Petch said.
There are still some factors preventing recovery and consumption growth… Resuming growth in real estate investment is an uphill battle.
Report of the National Development and Reform Commission
Premier Li Keqiang’s government work report delivered on Sunday reflects the uncertainty in the international environment. A separate report from the economic planning agency – the National Development and Reform Commission (NDRC) – went into more detail on the domestic challenges.
“There are still a number of factors hindering recovery and consumption growth,” the report said. “Sustaining growth in real estate investment is an uphill battle.”
“Some local governments are finding economic recovery difficult and are facing significant fiscal imbalances,” the report said. “The debt risk of local government financing platforms must be addressed immediately.”
Consumption is the key
Consumption could be the main driver of economic growth this year, Li Chunlin, deputy director at the NDRC, told reporters on Monday.
He added the commission has many tools to boost consumer spending.
GDP grew by just 3% last year, lower than the official target, as Covid-19 controls and the real estate slump dragged down growth. Retail sales are down 0.2% in 2022.
A shopping center in Qingzhou, Shandong province, broadcasts the opening ceremony of the Chinese National People’s Congress on Sunday, March 5, 2023.
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The impact of the pandemic has weakened, and the recovery in retail sales can only lead to growth, said Zong Liang, head of research at the Bank of China.
Overall, when there is a need for some increase in fiscal support, it is important not to “blindly” expand such support, he said, noting that it leaves room for future policy moves. That’s according to CNBC’s translation of the commentary in Mandarin.
Retail sales rose 12.5% in 2021 after falling in 2020. GDP rose 8.1% in 2021.
This year, the pressure on the economy has decreased significantly, and the economy can grow from a low base, said Xu Hongcai, deputy director of the Economic Policy Commission at the China Policy Science Association. “The key is to improve the quality of growth.”
An overall recovery in the economy could help boost fiscal revenues, and increase demand for workers, he said. But he stated that “this year, the biggest pressure is on foreign trade.”
Many economists expect China’s exports, at best, to barely grow this year. This is due to a decline in demand for Chinese goods as the US and European economies slow.
‘Fiscal buffer’
China announced on Sunday that its deficit-to-GDP ratio will rise to 3% from 2.8% last year. The country also increased the annual quota of special bonds by 150 billion yuan to 3.8 trillion yuan, or about $551.12 billion.
The move is not aggressive, more of a “fiscal buffer,” said Susan Chu, senior director at S&P Global Ratings.
“Because China is not going back to consumption-driven [economy]”He said. “There are many external challenges, property slowdown.”
The economic targets announced on Sunday follow directives set in December at a top-level meeting called the Central Economic Working Conference.
While the direction of policy is fairly clear, signals that boost confidence are needed, said Wang Jun, director at the China Forum of Chief Economists. He said the details could come in the next few days during China’s annual parliamentary session.
This year, the meeting is scheduled to inaugurate the new prime minister and other government leaders, as well as issue a “reform plan” for the Chinese Communist Party and state institutions.