China takes a cautious approach to its economy in 2023

  • Premier Li Keqiang’s government work report on Sunday pointed to growing uncertainties in the international environment.
  • Beijing on Sunday announced a growth target of “around 5%” of gross domestic product for 2023, with only a modest increase in fiscal support.
  • “The government’s conservative growth target of 5% for 2023 recognizes that China’s growth continues to face headwinds,” Martin Petch, vice president and senior credit officer at Moody’s Investors Service, said in a note.

BEIJING – China’s leaders have struck a cautious tone about the outlook for the country’s economic recovery after ending most Covid restrictions on business activity late last year.

Beijing on Sunday announced a growth target of “around 5%” of gross domestic product for 2023, with only a modest increase in fiscal support.

“The government’s conservative growth target of 5% for 2023 recognizes that China’s growth continues to face headwinds,” Martin Petch, vice president and senior credit officer at Moody’s Investors Service, said in a note. “These include the impact of slower global growth on China’s exports and risks associated with the property sector and local government debt.”

“The government’s mild expansion in fiscal support and more targeted monetary measures indicate that longer-term issues and curbing financial stability remain key elements of the long-term policy mix,” Petch said.

There are still some factors holding back consumption recovery and growth… Rekindling growth in real estate investment is an uphill battle.

Report of the National Development and Reform Commission

Premier Li Keqiang’s government jobs report on Sunday pointed to growing uncertainties in the international environment. A separate report from the National Development and Reform Commission (NDRC) – from the Economic Planning Institute – went into stark detail about the challenges at home.

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“There are still some factors holding back recovery and consumption growth,” the report said. “Restarting growth in real estate investment is an uphill battle.”

“Some local governments are struggling with economic recovery and face significant fiscal imbalances,” the report said. “Debt risks from local governments’ financial bases must be addressed immediately.”

Consumption could become the primary driver of economic growth this year, Li Chunlin, deputy director of the NDRC, told reporters on Monday.

He said the commission has several tools to boost consumer spending.

GDP grew just 3% last year, well short of the official target, as Covid restrictions and a real estate slump dragged down growth. Retail sales are expected to decline by 0.2% in 2022.

A shopping mall in Qingzhou, Shandong province, broadcasts the opening ceremony of China’s National People’s Congress, Sunday, March 5, 2023.

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The impact of the pandemic has weakened, and only a recovery in retail sales will drive growth, said Bank of China chief researcher Zhong Liang.

Overall, while some increase in financial support is needed, it is important not to expand such support “blindly,” he said, leaving room for future policy moves. This is according to a CNBC translation of his Mandarin comments.

Retail sales rose 12.5% ​​in 2021 after falling in 2020. GDP rose by 8.1% in 2021.

This year, the pressure on the economy has eased significantly, and the economy is likely to grow on a low base, said Xu Hongkai, deputy director of the Economic Policy Commission of the China Policy Science Association. “The key is to improve the quality of growth.”

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An overall recovery in the economy will help financial income grow and increase demand for workers, he said. But “this year, there is tremendous pressure on foreign trade,” he pointed out.

Many economists expect China’s exports to grow very little this year. This is due to falling demand for Chinese goods as a result of the slowdown in the US and European economies.

China on Sunday is expected to increase its deficit-to-GDP ratio to 3% from 2.8% last year. The country increased its annual allocation of special purpose bonds by 150 billion yuan to 3.8 trillion yuan, or about $551.12 billion.

Susan Xu, senior director at S&P Global Ratings, said the measures were not drastic and acted as a “financial buffer”.

“Because China has not returned to being completely consumption-driven [economy],” she said. “External challenges, the property recession is high.”

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The economic targets announced on Sunday follow directives set at a high-level meeting in December called the Central Economic Working Conference.

While the policy direction is very clear, more confidence-boosting signals are needed, said Wang Jun, director of China’s Forum of Chief Economists. Such details may come in the next few days during China’s annual parliamentary session, he said.

This year, the meeting is set to formalize the new premier and other government leaders and release a “reform plan” for the ruling Chinese Communist Party and state institutions.

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