China’s lowest annual GDP growth target in decades has reaffirmed the government’s focus in the first year of the post-pandemic era: high-quality growth driven by pragmatic policy.
Announced at the recently concluded 14th National People’s Congress (NPC) in Beijing, the target of 5% year-on-year growth for 2023 highlights the central government’s caution in the face of internal and external headwinds. Challenges include slowing domestic consumption, a struggling property market, lingering geopolitical tensions, and weakening demand for Chinese exports.
Last year, China recorded 3% growth, one of its lowest rates since the 1970s and well below the official 5.5% target. Growth was stunted by waves of Omicron outbreaks that prompted strict zero-COVID restrictions, which were finally lifted last December.
In our view, this target seems realistic, given excess household savings, pent-up demand and comparison with last year’s very low base.
What else did the nation’s highest-profile event of the year reveal about the direction of government policy? Here are our five key takeaways from the NPC.
1. The NPC signals pro-business pragmatism and economic policy continuity.
The newly elected Premier Li Qiang affirmed the government’s unwavering support for the private sector and pledged to “stay firmly committed” to pursuing the state’s opening-up policyFootnote1. This could help boost market confidence and facilitate China’s recovery.
“From a new starting point, we will create a market-oriented, legalized and internationalized business environment, treat enterprises of all types of ownership equally, protect the property rights of enterprises and the rights and interests of entrepreneurs,” Premier Li said in Mandarin in his speech at the NPC.
He added that the new government will continue “promoting fair competition among various business entities, and supporting the development and growth of private enterprises.”
The reappointment of key economic policymakers also suggests continuity in economic policy implementation.
2.The restructuring of China’s State Council reflects Chinese policymakers’ focus on preventing financial risk and countering U.S. technology regulations.
The State Council Institutional Reform Plan, which was approved by the NPC, makes several major changes to government bodies and implements a major overhaul of the financial system.
These include:
- Consolidating the financial regulatory regime via the new National Financial Regulatory Administration (NFRA). It replaces and expands on the role of the China Banking and Insurance Regulatory Commission, taking over more supervisory functions. This is aimed at further addressing the regulatory gap and ensuring a consistent supervisory framework across the whole financial market, and is consistent with the government’s “risk prevention and more coordinated supervision” mindset.
- Restructuring the Ministry of Science and Technology. This is in line with the country’s efforts to boost R&D and increase self-reliance in technology.
- Setting up the National Data Bureau. This highlights the importance of data security and the digital economy.
3. People’s wellbeing highlighted as a priority by the new Premier.
“Most people do not keep their eye on GDP growth all the time. What they care more about are things that happen in their everyday life,” said Premier Li. These include housing, employment, income, education, healthcare and the environment.
This focus clearly defines what the government means by “high-quality growth”, with this year’s less-aggressive growth target helping to balance this priority on the wellbeing of its people. Li’s goals include creation of around 12 million urban jobs this year, up from last year's target of at least 11 million.
4. Measured monetary and fiscal policies are consistent with expectations for a year of normalization.
Macroeconomic policies will become more measured this year, with flexibility retained to accommodate uncertainties. The government’s work report pledged that credit growth would be in line with nominal GDP growth.
The fiscal deficit target has been set at 3% of GDP, a slight increase from 2.8% in 2022. We expect a moderate fiscal consolidation in terms of augmented fiscal deficitFootnote2, given the central government’s continued concern about local government financing vehicle (LGFV) borrowing and weak land sales revenue.
Nevertheless, should growth be weaker than expected, room remains for the government to relax its credit policies and add more fiscal support for infrastructure via policy bankFootnote3 special bonds or front-loading next year’s quota of local government special bondFootnote4 (LGSBs) issuance.
5. Property sector policies will continue to ease, with the goal of stabilizing the market.
While the goal of developing a healthy housing market has not changed, the government likely will continue to relax housing policies in order to stabilize the market. The government work report pledged to promote the sector's stable development and prevent “disorderly expansion” by developers, while warding off risks for “high-quality, leading real estate developers”. A housing boom based on the use of high leverage is therefore unlikely to repeat.
As a proxy for land sale revenue for 2023, the target for local government-managed funds, of which land sales account for a predominant portion, is set at only 0.4% above the depressed level of 2022. This reflects the government’s conservative expectation for the housing market and the balance it wants to achieve.
More policy easing at the city-level should lift demand, and the government will prioritize further credit and liquidity support for unfinished projects and qualified developers. Greater support for public housing (such as shanty town renovation and affordable housing projects) would help offset softness in the private housing market.
In the long term, the policy of “housing is for living, not for speculation” is unlikely to change, and mitigating risk remains the government’s bottom line.
