MNI: China’s Prudent Targets, Stimulus Show Risks To Recovery

The conservative 2023 growth target and stimulus unveiled at China’s National People’s Congress underscored the challenges confronting Beijing in its drive to deliver a recovery amid sluggish domestic demand, softer exports, a weak property market and high local government debt, policy advisers and economists told MNI.

The growth target of “around 5%” offered in Premier Li Keqiang Work Report was viewed as a baseline for likely growth of 5%-5.5%, a realistic goal as the economy rebounds from pandemic lows but confronts what Li labelled the “pronounced problem” of insufficient demand, as well as high global inflation, weak export demand and foreign efforts to restrict China modernisation. (See MNI: China's Consumption Rebound On Track But Risks Remain)

The target of “around 5%” was a bit lower than the 5%-6% expected by many advisors considering the lower comparison base last year, said Dong Ximiao, chief researcher at Merchants Union Consumer Finance. He said the target indicated the economy was likely to see a gradual recovery rather than a stimulus-boosted rebound, and that headwinds persist.

The target is practical but “not very easy to reach”, said Zhang Yongjun, economist at China Center for International Economic Exchange. He said exports would drag on growth in 2023 after adding 0.5 percentage points in 2022, while investment in infrastructure and manufacturing, which contributed over 1.5 percentage points to GDP growth last year, was likely to be stable at an already fast pace.

Zhang said the target would require consumption, which remained soft as retail sales contracted 0.2% y/y in 2022, to expand by over 7% y/y, and the property sector to bottom and then deliver a modest recovery.

The GDP target and policy stance telegraphed a message of “making steady progress”, though there is uncertainty about the recovery in household, business, and government balance sheets after three years of Covid shock, said Guan Tao, global chief economist at BOC International.

He said the conservative target could help cool overly optimistic expectations for recovery, but policymakers will strive for a better result through expansionary fiscal moves and accommodative monetary policy.

FISCAL EXPANSION

The fiscal deficit/GDP ratio was set at 3%, 0.2pps higher than 2022, with the deficit to expand to CNY3.88 trillion, up CNY510 billion year-on-year. The quota of local government special bonds increased to CNY3.8 trillion from CNY3.65 trillion last year.

The deficit ratio was at the bottom of an expected 3%-3.5% range, and CNY3.8 trillion quota of LGSB was less than the actual CNY4.15 trillion last year, said Zhao Quanhou, director of the Financial Research Center at the Chinese Academy of Fiscal Sciences under the Ministry of Finance.

Zhao said the modest rise in the deficit ratio and quota for LGSBs reflected the already high levels of local government debt and the central government’s tight balance sheet as it filled the local fiscal gap through increased borrowing via debt issuance. Fiscal revenues would benefit from lower spending on Covid controls and as the economy recovered, he said. He forecast GDP could rise 6% should the current recovery be sustainable, though there would then be challenges from weaker external demand and geopolitical conflicts. Premier Li said authorities should “prevent and defuse local government debt risks” by reducing interest payments, prevent the build-up of new debt, and reduce existing debts. A focus on higher quality growth over the long-term likely restrained more fiscal stimulus, economists said.

TARGETED MONETARY POLICY

The Work Report also offered a more conservative role for monetary policy in 2023. The People’s Bank of China will deliver “a prudent monetary policy in a targeted way”, a less muscular call than last year when the bank was expected to “strengthen the force of prudent monetary policy”.

CPI was targeted at around 3%, while M2 money supply and aggregate financing will “increase generally in line with nominal economic growth”.

Guan said the PBOC needs to maintain liquidity ample to coordinate with the fiscal expansion as there will be an acceleration in both central and local government debt issuance after the NPC. He said there was room for cuts to policy rates and the reserve requirement ratio and expected the use of targeted tools to support the recovery.

Zhang said an urgent task was channeling liquidity to the real economy since M2 had expanded by 11.8% by the end of 2022 compared to nominal GDP growth of 5%, meaning monetary policy was quite loose.