Saturday, October 28, 2023

China’s Lowest Growth Target in Decades: Why?


China has set a target of 5% economic growth for 2023, one of its lowest targets in decades. The announcement was made by outgoing Premier Li Keqiang at the opening of the National People’s Congress in Beijing. The conservative target comes as China seeks to rejuvenate its economy after scrapping its “zero-COVID” policy of lockdowns, mass testing and quarantine late last year. The move is aimed at boosting the world’s second-biggest economy, which officially grew 3% in 2022, well short of the target of about 5.5%.

The pandemic restrictions, a property market slump, government crackdowns on private enterprise, and the US-China trade war all contributed to the slower growth rate. Excluding 2020, last year’s economic growth rate was the lowest since 1976, the last year of Mao Zedong’s cultural revolution. Although China’s economy appears to be rebounding strongly from the pandemic, with manufacturing activity in February expanding at the fastest pace in more than a decade, Chinese officials have warned of risks ahead.

Li pointed to the rise of “uncertainties in the external environment,” including high inflation, and “external attempts to suppress and contain China” – a thinly-veiled reference to the country’s heated geopolitical competition with the US. China’s economy faces serious long-term challenges domestically, too, including an enormous housing bubble and a shrinking working population due to a rock-bottom birth rate. Many economists believe that China’s high-growth era – characterised by decades of double-digit expansion each year – is now in the past.

During the opening of the NPC, Li indicated that Beijing would not lean heavily on government coffers to stimulate growth, stressing the need to revive private consumption and stabilise spending on “big-ticket items”. Li said the government would aim for a fiscal deficit of 3% relative to the gross domestic product (GDP) in 2023, up slightly from 2.8% last year. He also put heavy emphasis on job creation, setting out a goal of 12 million new urban jobs in 2023, up from a target of 11 million jobs in 2022.

Alicia García-Herrero, chief economist for the Asia Pacific at Natixis in Hong Kong, said that China was managing expectations with its modest target. “If you look at the details, they are announcing less issuance of special government bonds because they did a lot of front-loading and they don’t want to make a budget deficit.” Zhiwei Zhang, chief economist at Pinpoint Asset Management in Hong Kong, said the modest target may also be a holdover from the more pessimistic economic outlook that held sway during the Central Economic Working Conference in December.

Most economists believe that China will be able to hit, and perhaps exceed, 5% growth in 2023, especially with the economy coming off a low base last year. The ING financial group said in a note that Beijing’s target should be seen as the “floor of growth the government is willing to tolerate”. Zhang of Pinpoint Asset Management said: “Given the very low base of economic activities last year, it is unlikely to see growth drop below 5%… There is no fiscal stimulus from the NPC, which is not surprising as the economic recovery is already on track.” García-Herrero said China’s economy will “probably” expand more than 5% this year.

Latest stories