China’s robust growth target signals more stimulus to come


HONG KONG — By calling for 5.5% growth this year, Chinese leaders have set the bar relatively high for an economy facing a litany of challenges at home and abroad — and led the way, according to economists, to more aggressive stimulus measures in the coming months.

Officials in Beijing said on Saturday they would seek to raise gross domestic product by 5.5% this year. While that target is lower than any annual target since China began setting such benchmarks in 1994, economists say it’s actually a much bigger increase than its target of 6% or more. for 2021, given last year’s Covid-related statistical distortions and growing headwinds facing the world’s second-largest economy.

More than two years after the first outbreak of the Covid-19 pandemic in Wuhan, the benefits of China’s export-fueled recovery are beginning to fade, replaced by growing pressures at home and abroad: a government-induced housing slowdown, tight pandemic restrictions that have stifled domestic consumption, and now growing uncertainties about energy prices and economic sanctions related to the invasion of the Ukraine by Russia.

“China is under triple pressure of falling demand, disrupted supply and weakened expectations,” Chinese Premier Li Keqiang told officials at the opening of annual legislative meetings in Beijing on Saturday. “Local cases of Covid-19 are still occurring sporadically. The recovery in consumption and investment is slow. It is becoming more difficult to maintain a steady growth in exports and the supply of energy resources and raw materials remains insufficient.

Given the challenges currently facing Chinese economic planners, a 5.5% growth target is actually “pretty high”, says Bert Hofman, director of the East Asian Institute at the National University of Singapore and a former World Bank economist.

For Mr. Hofman and other economists, the relatively ambitious target partly reflects the political imperatives of a year in which leader Xi Jinping is expected to break with recent precedent and seek a new term in office in a key meeting of the Communist Party. Li said on Saturday that his economic efforts “will enable us to pave the way for a successful 20th National Party Congress.”

The more aggressive target also signals that further government interventions are likely, economists say, including an expected increase in government infrastructure spending.

On the monetary policy front, the Chinese central bank has already lowered its key rates twice since December. This could ease further as inflation is less of an issue in China than in the West. China on Saturday maintained its consumer inflation target of around 3% this year, despite rising oil prices, giving its central bank some breathing room.

“Government policy support for growth will need to be stronger than last year,” Hofman said.

Beijing could also ease some of the reforms it imposed last year on the tech and real estate sectors. They aimed to address longer-term imbalances and inequalities, but dampened consumer confidence and short-term wage growth.

Beijing recently signaled it was keen to avoid a prolonged slump in the property market, which accounts for a fifth of China’s overall growth by some estimates and is a vital source of revenue for local governments.

Officials also appear to be toning down their insistence on “common prosperity,” a political buzzword that has risen to prominence over the past year amid a focus on inequality — and which has spooked many in the private sector. The phrase only appeared once in Saturday’s budget report.

By contrast, the robust GDP target signals Beijing’s willingness to sacrifice some of its more ambitious long-term goals for short-term growth – “to take on more short-term debt burdens to ensure that growth can reach a relatively high level”. says Larry Hu, chief China economist at Macquarie Group.

It projects year-on-year GDP growth of around 4.5% in the first half of the year, rising above 5% as more stimulus takes effect ahead of Congress. left.

Historically, Beijing has relied on building bridges, airports and railways to drive economic growth. But there are fewer worthwhile projects left to undertake, and many have ended up burdening local governments with unnecessary debt.

According to Iris Pang, chief economist for China at ING Bank, a potential change could be to invest more in green energy, which would help the country meet its long-term climate goals, while increasing GDP in the short term. .

Investment in infrastructure rose 0.4% in 2021 from a year earlier, well below the 13.5% rise in investment in manufacturing, according to official data from China. Nomura economists predict growth in infrastructure investment could rebound to around 7% this year.

A mall in Shanghai, China. Beijing is still trying to boost consumption, introducing new policies in recent weeks to support retail spending.


Photo:

News by Qilai Shen/Bloomberg

China has set this year’s budget deficit-to-GDP ratio at 2.8%, down from 3.2% last year. While that appears to mark a pullback in spending, that’s not the whole story, economists say. The central government, for example, will divert nearly 9.8 trillion yuan, or about $1.6 trillion, to local governments this year, an increase of 18% from a year ago and the largest increase of recent years, Mr. Li said on Saturday.

According to Peking University finance professor Michael Pettis, relying more on government-led infrastructure and real estate-led growth would mark a step backwards in Chinese leaders’ attempts to pivot to a more fueled by consumption, exports and investment.

Admittedly, Beijing has not given up on boosting consumption. China’s main economic planning agency, the National Development and Reform Commission, has introduced new policies in recent weeks to bolster retail spending, moves that were echoed in Li’s speech on Saturday.

The biggest boost in consumer spending – the most stubborn laggard of China’s pandemic recovery so far – could come in the form of an easing of Covid-19 restrictions, which have consistently plagued tourism sectors , leisure and retail of the country.

Beijing has started to explore the possibility of gradually moving away from its strict Covid containment measures, the Wall Street Journal reported, although a full reopening is unlikely before the party’s convention this fall.

Goldman Sachs economists,

referencing the Journal report, said even a small-scale easing of China’s pandemic restrictions could “modestly boost this year’s GDP growth.”

Yet, given that the government expects personal income to grow only in line with GDP growth this year, “it is unlikely to be the year that consumption takes the lead in domestic demand”, says Mr. Hofman of the National University of Singapore.

Write to Stella Yifan Xie at [email protected]

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