MNI: China Must Target Growth Above 5%, Refine Covid Controls

China’s policymakers must aim for growth of above 5% in 2023 if its long-term growth goals are to be hit, but the success of more stimulatory fiscal and monetary policy in reviving the economy hinges on Beijing’s ability to deliver a more balanced approach to Covid controls, policy advisers and economists said.

High ranking policy advisers have joined the growing chorus of voices calling for the government to set a GDP target of “above 5%” or “around 6%” ahead of the annual Central Economic Working Conference, where key policymakers will gather in the middle of the month to map out the economic priorities for the coming year. (MNI POLICY: China's New Leaders Face Challenges In Reform Push)

A growth target in excess of 5% in 2023 will require the central government to increase spending and its budget deficit to rise above 3% as the People’s Bank of China’s stimulus may be limited to targeted measures to boost growth.

China may set a target of “about 6%” during the National People’s Congress next March, but in practice it should push for 7% growth to deliver average GDP growth of above 5% across 2022 and 2023, said Jia Kang, head of the China Academy of New Supply-side Economics and former head of the Chinese Academy of Fiscal Sciences, which is housed under the Ministry of Finance. He estimated 2022 growth will struggle to exceed 3.3%.

Adding pressure on policymakers is the need to deliver on Beijing’s own goal of doubling the size of the economy between 2020 and 2035 and to become a medium-developed economy. Jia said this requires average annual GDP growth of about 5% over those 15 years, suggesting a “reasonable growth” range of an average 5.5%-6% from 2020-2025, then 5-5.5% for the next five years, and 4.5-5% over the final half-decade.

Short term growth will require expansionary policy, including more fiscal spending and government borrowing that will lead to a higher budget deficit/GDP ratio. The PBOC is expected to keep liquidity ample and provide support through targeted tools to key sectors such as property, the digital economy and manufacturing, Jia suggested. (MNI PBOC WATCH: Targeted Easing To Boost Credit, RRR Cut Seen)

The PBOC may cut the rate on medium-term lending facilities by 5 bps in 2023, which would guide down the one-year loan prime rate by 5 bps to 3.6%, Bank of China calculates. Additional fiscal spending will push the budget deficit ratio to over 3% from 2.8% in 2022. (MNI POLICY: Fiscal, Credit Support To Drive China Growth Plans)

Apart from accelerating vaccinations and easing quarantine rules, China should deploy more targeted monetary easing through cuts to the reserve requirement ratio, said Bank of China chief researcher Zong Liang. However, he said room for big policy rates cut would be limited while the Federal Reserve was hiking U.S. rates.

COVID CONTROLS

Beijing’s willingness to adjust its Covid controls is integral to reviving growth. Bank of China has forecast three growth scenarios for 2023 – 3.6%, 5.3% and 6.6% - that account for differing modifications to Covid controls and the impact on credit demand and market confidence.

The CEWC is expected to signal the government’s willingness to more precisely balance the resumption of production and Covid controls to support growth, Jia said. Zong echoed that sentiment.

The economy would recover if the Covid situation does not deteriorate, said Zhu Zhenxin, chief researcher at Rushi Financial Institute. He said the current easing monetary environment would continue, with increased use of specific tools including pledged supplemental lending and raised quotas for local government special bonds.

Zhu expected the trend of modifications being made to Covid controls to continue. Ahead of the CEWC, he said market confidence would be boosted if policymakers keep stressing their determination to stabilise the economy.