China has set a lower-than-expected growth target for its economy of "around 5.0%" this year, a cautious tone after it missed last year's GDP bulls-eye badly.
Economists had expected a figure similar to last year's target of "around 5.5%," with some predicting the government might set the figure as high as 6.0%. But as the world's second-largest economy grinds back into gear, the Beijing administration is setting a modest goal after growth in 2022 came in at only 3.0%.
So far, there's been no significant stimulus announced in Beijing to supercharge China's uneven recovery. As a result, markets met the tepid growth forecast with a muted response. The CSI 300 index of the largest listings in Shanghai and Shenzhen lost 0.5% on Monday, while the Hang Seng Index in Hong Kong inched ahead 0.2%.
China said it would increase defense spending 7.2% but left its wording on Taiwan largely unchanged. The lack of optimism in the overall GDP forecast suggests President Xi Jinping may revisit some of his dogma-driven industry reforms, with Beijing doing little to turbocharge growth.
Premier Li Keqiang set the GDP target in opening the National People's Congress (NPC) on Sunday, delivering his Government Work Report, a state-of-the-nation address that is his last major act in office before retiring. His departure after a decade as China's top civil servant is part of a forced standing down of bureaucrats who favored economic liberalization; replacing them are Communist Party loyalists close to President Xi. Li Keqiang's likely successor is former Shanghai Communist Party boss Li Qiang.
Although Xi abolished term limits on the presidency so that he can serve an unprecedented third term, the two-term rule still applies to other posts. Li saw little of the limelight during his 10 years as premier, a period during which Xi reinforced his own position and enshrined his theories in the Communist charter.
Xi has also weakened the power of the premier, who heads China's bureaucracy, by transferring powers previously held by members of the State Council, China's cabinet, into Communist Party entities that Xi, as general secretary of the party, directly controls. One outcome of the fortnight-long "Two Sessions" legislative meetings that began this weekend is likely to be greater consolidation of powers under party units, as I outlined last Friday.
The Two Sessions, which is China's legislature and this year brings together 2,977 delegates, runs alongside the Chinese People's Political Consultative Conference (CPPCC), an advisory body. Both are really rubber-stamp entities but establish important policies and priorities for the year ahead. The meetings are due to run through March 13. With 29 absentees, 2,948 gathered in the Great Hall of the People on Sunday to start the National People's Congress.
Whereas Li has favored an economics-driven, numbers-based approach to running the country, Xi has demonstrated greater Communist-credo adherence, favoring centralized command. Before last year's economic downturn, Xi had begun to explore Maoist-themed initiatives to running the country, curbing the influence of the private sector and imposing a series of fines and penalties for perceived corporate abuses.
Li may be best-remembered abroad for giving us the "Li Keqiang Index." According to a WikiLeaks release of U.S. State Department cables, Li told diplomats that China's growth numbers are "man-made" and that he looks at factors such as electricity demand, rail cargo traffic and bank lending as more accurate indicators. The Economist then crafted an index tracking Chinese growth along those lines.
The malleability of Chinese growth figures means it is the magnitude and direction of growth data that are most revealing, not the precise numbers. Provincial officials traditionally have had their performance linked to factors such as the output of the province, so they have had an incentive to exaggerate numbers. With a little massaging of the figures, China has also shown an uncanny ability to hit the growth target set each March -- something that makes last year's miss so remarkable.
The Covid monkey wrench
The anti-Covid campaign championed for so long by Xi called for a crackdown on every outbreak with the aim of reducing cases in that locale to zero. Once the highly infectious Omicron variant started doing the rounds, it evaded even the harshest lockdown methods. Demonstrations broke out around the country as citizens expressed frustration at the level of state intrusion into every level of activity, causing the sudden abandonment of zero-Covid overnight, on Dece. 7.
A massive nationwide outbreak of disease ensued. The stop-start recovery is reflected in last year's growth number, and I guess we will see the impact of essentially everyone falling sick at the same time in this year's figure, which may explain why Li set a low mark. One of the few positives surrounding an outbreak that cost countless lives is that it finished surprisingly quickly, peaking in January and with the infection wave seeming to pass after the Lunar New Year late that month.
Chinese investment bank CCB International says the "cautious" target for 2023 growth likely reflects concern about the elevated jobless rate and problems with financing local governments after the costly zero-Covid quest. The central government is expanding its fiscal deficit and bond issuance quota, likely leading to a "moderately expanding" credit cycle, CCB says.
Although China's manufacturing sector is cranking back into gear, global demand is lackluster thanks to the impact of higher interest rates in the West. Chinese consumers also have been reluctant under current conditions to commit to big-ticket purchases such as cars and homes. The work report indicates the Beijing leadership will try to reduce the cost of childbirth, childcare and education in a bid to stimulate a higher reproductive rate. China's population fell last year for the first time since the famine of 1961.
Li repeated a phrase first coined by Xi that "housing is for living in, not for speculation," with the outgoing premier saying the Communist Party will strive to stop "disorderly" expansion of the property industry. Nomura says that because housing sales have improved since mid-February, the government believes there's no need for easing policy right now to support an industry it has been attempting to reform by cutting back leverage.
Nomura says this year's growth target is the most conservative that China has ever issued; it did not provide one in 2020 due to Covid uncertainties. With inflation forecast at "around 3.0%" this year after it came in at 2.0% in 2022, the projections are "relatively conservative but pragmatic," the Japanese investment bank concludes.