MNI: China's 2022 GDP Target Augurs Monetary Easing-Advisors

China will further ease monetary and fiscal policy to help the economy achieve a record-low target for growth of around 5.5% this year in the face of headwinds at home and abroad, policy advisors told MNI.

China will “encounter many more risks and challenges” in 2022, Premier Li Keqiang said on Saturday in his annual work report at the opening of the fifth session of the 13th National People’s Congress, telling roughly 3,000 delegates that "policy tools in reserve should be promptly deployed to ensure stable economic performance”.

In addition to GDP, the Government Work Report set targets for employment, inflation, money supply, the exchange rate, and the national budget, setting the policy tone for the year.

The around-5.5% target, towards the upper range of economists’ expectations of 5-5.5%, may require a more aggressive policy stance than anticipated, several advisors said.

RRR CUTS

The People’s Bank of China is now likely to make further cuts to banks’ reserve requirement ratios, though it will be cautious regarding policy rate cuts as it monitors U.S. monetary tightening and domestic inflation, said Xu Hongcai, deputy director of the Economic Policy Commission of the China Associate of Policy Science.

The M2 gauge of broad money could grow by about 10% in 2022, following a 9.8% increase in January, while the total social financing measure of credit would continue expanding at a double-digit pace after January’s 10.5%, said Xu, who had considered a target of “above 5%” to be more practical.

“The GDP target sets a positive and progressive tone,” said Wang Jun, an academic committee member at the China Center for International Economic Exchanges, agreeing that it will require a more intense and better coordinated policy effort.

According to the report, the PBOC’s prudent monetary policy stance will “step up” and “expand the scale of new loans,” achieving “a considerable drop in overall financing costs”.

This could mean cuts of 30-50 basis points in the PBOC’s medium-term lending facility and loan prime rates, said Zhang Ming, deputy head of the Institute of Finance and Banking at the Chinese Academy of Social Sciences.

INFLATION TARGET

The inflation target was set at around 3%, unchanged from last year’s goal and compared with CPI growth of 0.9% in 2021. While the 3% level is unlikely to be reached, risks of higher inflation need to be monitored, particularly as geopolitical factors push energy prices higher, said Zhang Yongjun, deputy chief economist with CCIEE.

China is a big importer of oil and grain from Russia, Xu said, noting that the report called for authorities to "ensure food and energy security”.

While the fiscal deficit target of around 2.8% of GDP was lower than the expected level of more than 3% and down from last year’s “above 3.2%”, the broader general deficit ratio will expand to around 7% from last year’s 5.2%, according to calculations by Wang. The general deficit will include an unchanged quota for CNY3.65 trillion of infrastructure-backed local government special bonds.

Tax cuts and rebates announced in the report, many directed at smaller companies and totaling CNY2.5 trillion, were also larger than expected, and compared to last year’s tax and fee cuts of over CNY1 trillion. The CNY1.5 trillion boost to transfer payments to local governments to CNY9.8 trillion was the largest increase in many years, the report showed.

Overall fiscal spending will expand by over CNY2 trillion from last year to CNY26.7 trillion in 2022, thanks to accumulated multi-year profits handed over by state-owned financial institutions and state monopolies, Premier Li said.

"The economy may even achieve growth above 5.5% should the real estate sector rebound strongly," said Wang, who is also chief economist of Zhongyuan Bank and who estimates real estate investment could reverse the current decline to rise 3-5% in 2022 in response to relaxed restrictions and an easing finance and credit environment.

Still, the lower-than-expected fiscal deficit target reflects authorities’ emphasis on fiscal sustainability, said Wang.