China will target growth of 5.5% in 2022, at the high end of expectations but still far off the double-digit pace we'd grown used to, as the Middle Kingdom grew to become the world's second-largest economy.
Premier Li Keqiang delivered a forecast of GDP growth of "around 5.5%" while giving his annual work report to the National People's Congress, the Chinese Communist Party's yearly agenda-setting meeting for the country's economy.
"This is a highly challenging target," Société Générale economists Wei Yao and Michelle Lam say in a research note. It is an acceleration from the two-year compound growth 5.1% rate established in 2021, and there are plenty of headwinds blowing against the Chinese economy.
Top of the list: China still has a "zero-Covid" policy that requires a disruptive snap local lockdown wherever cases break out. It's hardly a realistic approach in the face of the hyperinfectious Omicron variant. A leading Chinese virus expert has hinted at a change in approach, as I mentioned on Friday, with the potential for China to move toward "Chinese-style coexistence with the virus," whatever that means.
It's vague language that allows the Chinese Communist Party to carve out any old "live with Covid" strategy that it likes, explaining away any aberrations by saying they're necessary in China. It would be a face-saving step designed to discourage too many people from asking why such harsh lockdowns were ever necessary.
But the CCP has so far struck a fine balance by avoiding an overload of the Chinese healthcare system, which is not strong outside the major cities, while permitting much of daily life to return to normal. This has been achieved by barring nearly all overseas travel. The number of Chinese passports issued in the first half of last year was just 2% of the number issued in the first half of 2019.
China set a growth target of "over 6%" for 2021, and official growth came in at 8.1%. Given the wild swings in the economy produced by the pandemic, China also cites the 5.1% average compound annual growth rate over 2020 and 2021, combined.
Li, speaking to around 3,000 delegates in the Great Hall of the People on Saturday, laid out the lowest growth target since 1991. He acknowledges that China "could face more difficulties and challenges this year," and pledges that China will issue C¥2.5 trillion (US$396 billion) in tax refunds in 2022, in support of the private sector.
President Xi Jinping directed a series of regulatory crackdowns over the course of the last 18 months, in particular targeting Big Tech but also highlighting the "disorderly expansion of capital." Quite what the "orderly expansion of capital" looks like is unclear; the criticism, part of the overarching "Xi Jinping Thought" that's now codified in the Chinese Communist Party charter, gives license for the party to curb the power of the private sector, and take down a notch both Chinese "unicorn" companies and its billionaire entrepreneurs.
Meetings like the NPC owe a lot to the Marxist-Leninist roots of the Chinese Communist Party, and the "five-year plan" style of a command economy. Li praised the work of "market entities, over 100 million in number," for having responded "with fortitude and resilience" to the shocks of the last year. "Employment is pivotal to people's well-being," he continued, suggesting the party is not at this time in a position to push its difficult overhaul of its inefficient, bloated state-owned enterprises. "Our efforts to keep market entities afloat are aimed at maintaining stable employment and meeting basic living needs."
China is resisting direct stimulus from the government to support the economy as it slows, and Li said the government will target a fiscal deficit of 2.8% of GDP this year, down from 3.2% in 2021. But economists believe Beijing will continue to roll out dovish policies this year, and is even warming to the property sector, where prices have gone into reverse. It kept its inflation target at "around 3%," and the forecast for land sales stays flat, an optimistic call given that many parcels of land are going unbought due to the financial deleveraging forced on developers.
The SocGen team calculate that the measures announced at this meeting equate to fiscal stimulus of around 3% of GDP. That's one percentage point larger than the economists expected. Li frequently stressed "stability," and he repeated the Communist Party's clarion call that "housing is for living, not for speculation," suggesting it will pull support once again if home prices start to rise.
It is not yet therefore time to consider buying the beaten-down shares of Chinese developers. Li warned that "land prices, home prices and general housing market's expectations should be stabilized," with affordable housing and an expansion of the rental-housing stock high on his list of priorities. Nomura says the overall impression, coupled with no mention of imposing a property tax, is that policy has turned "slightly friendly" toward the beleaguered property sector.
The NPC, coming on the heels of the closing ceremony for the Beijing Winter Olympics on February 24, marks the second major marker for the Chinese government this year. It is building toward the 20th Party Congress, likely in November, the latest installment of a key leadership overhaul that's held once every five years. At this Party Congress, Xi will be seeking an unprecedented third term as president, having pushed through a change in the constitution that will allow him to run again. He will surely be unopposed but must still muster the support of the party. Xi wants to be able to declare victory over the coronavirus and point to solid steering of the economy.
Li did not mention the Russian invasion of Ukraine, but the geopolitical distress haunts this year's proceedings. China is staying largely silent, not wishing to criticize its ally, Russia, but is therefore giving tacit support of the war. It is attempting to cast itself in the role of peacemaker, but it may find it hard to push Russian President Vladimir Putin to the negotiating table at a time he appears recalcitrant. Putin is insisting on the "demilitarization" of Ukraine, but China - whose officials stress over and over again the importance of national boundaries and "sovereignty" - has done nothing to criticize the clear violation of Ukraine's borders.
Chinese shares are dropping today in synch with other Asian markets. The CSI 300 of the largest companies in Shanghai and Shenzhen ended down 3.2%. As is usual when there's selling in this downturn, Hong Kong has fared worse than most, with the Hang Seng lurching 3.7% lower.
It's another heavy day of selling on Asian markets on Monday, with the Topix in Japan closing down 2.8%, and all major indexes lower. The day began badly after oil shot up, with Brent crude up 8.9% at the time of writing, having risen briefly above US$130 per barrel. That hurts most Asian nations, which bar Malaysia all import large amounts of oil. The United States is leading the charge in figuring out how to restrict and sanction oil shipments out of Russia, the world's third-largest oil exporter.
The Sensex in India is also down 2.7% at the time of writing. China and India bookend the United States as the three largest importers of oil in the world.
Indonesia is also a major oil extractor, although the former OPEC member is now a net importer of oil. Still, the production levels out of Southeast Asia are insulating those markets slightly on Monday. The Jakarta Composite Index were down 0.8%, Singapore stocks were 1.0% lower an hour before the close, and Malaysian equities were off 2.3%.