China's New Economic Blueprint: Charting a Path Forward for Sustainable Growth
After lifting most Covid restrictions on business activity late last year, Chinese leaders have struck a cautious tone about potential economic recovery. On Sunday, Beijing announced a GDP target growth of only "around 5%" for 2023 with just a slight increase in fiscal support. Still, 5% may be too ambitious. "The government's conservative growth target of 5% in 2023 continues to face headwinds as the recovery in China's growth continues," said Martin Petch, vice president and senior credit officer at Moody's Investors Service. "This includes the impact of a global economic slowdown on China's exports and the risks associated with the real estate sector and local government debt."
Premier Li Keqiang's government work report released Sunday noted growing uncertainty in the international environment. A report from the National Development and Reform Commission's (NDRC) economic planning authority was even more pessimistic about the domestic challenge. "There are still several factors hampering the recovery and growth of consumption," the report said. “Resuming real estate investment growth is an uphill battle.”
"Some local governments are struggling to recover their economies and are facing serious fiscal imbalances," the report said. “Debt risks from local government funding platforms need to be addressed immediately.”
NDRC deputy director Li Chunlin told reporters this Monday that consumption could be a source of economic growth, declaring that the commission has many tools to boost consumer spending. Last year's GDP growth was a mere 3%, well below the target. Covid restrictions and housing weakness, however, dragged down 2022 growth – retail sales declined by 0.2% during the year. “The impact of the pandemic is easing and a recovery in retail sales alone can drive growth,” said Zong Liang, the chief researcher at the Bank of China. The state has also increased its annual quota of special bonds, used to raise government funds, by 150 billion yuan to 3.8 trillion yuan, roughly equating to $551.12 billion.
While an increase in fiscal support is necessary, such support cannot come "blindly," Liang claimed, noting that this restraint still leaves room for future policy. Still, China has experience with recovering from adverse economic years. Retail sales recovered by 12.5% in 2021 after a prior slump in 2020. Furthermore, China’s GDP increased by 8.1% in 2021. Xu Hongcai, deputy chairman of the economic policy committee of the China Association for Policy Science, stated that pressure on the economy has eased significantly this year, adding optimism for potential growth. “The key is to improve the quality of growth.” Overall, according to Hongcai, economic recovery could further boost tax revenues and stimulate demand for labor.
Hongcai also noted, however, that "this year, the biggest pressure is on foreign trade." Many economists expect little, if any, growth in Chinese exports this year. This is due to a sharp drop in demand for Chinese products resulting from the slowdown of the European and United States economies. China announced on Sunday that its trade deficit is expected to rise to 3% from 2.8% a year earlier.
Wang Jun, director of the China Chief Economists Forum, said that China’s policy direction was fairly clear but was in need of more confidence-boosting signals. He said such details could be revealed during China's annual parliamentary session. At this year's conference, the new prime minister and other government leaders will be formally announced, as well as a "reform plan" for the ruling Communist Party of China and state institutions.