China set an ambitious economic growth target for the year, putting the spotlight back on fiscal stimulus to counter risks of an ongoing property market slump and rising geopolitical tensions.
While the growth goal of about 5.5% for this year is the lowest in more than three decades, it’s above the consensus forecast of 5% and the International Monetary Fund’s projection of 4.8% expansion. Economists said the target implies Beijing will increase infrastructure spending, cut interest rates further and do more to stabilize housing.
Premier Li Keqiang vowed at the opening of the National People’s Congress, the Communist Party-controlled parliament, to take bold steps to protect the economy as risks mount.
“Comprehensively judging the situation at home and abroad, the risks and challenges facing the country’s development have increased significantly this year,” Li told delegates Saturday. “The harder things get, the more confident we must be.”
The slump in China’s huge property market and sporadic outbreaks of coronavirus have been a drag on the world’s second-largest economy, a key source of global demand. Growth slowed to 4% in the final quarter of 2021, before a spike in global tensions caused by Russia’s invasion of Ukraine roiled financial markets and stoked commodity prices.
Policy makers are trying to ensure growth is fast enough to create sufficient jobs and maintain social stability, while avoiding over-stimulating the economy, which would come with its own risks, such as inflating the nation’s already heavy debt burden or fueling financial market bubbles.
Shoring up growth is of political significance to the Communist Party and President Xi Jinping, who is expected to make an unprecedented bid to stay on as leader for a third term at a key party meeting later this year. Officials have highlighted economic stability as a top priority and urged faster spending from local governments.
Fiscal boost
Fiscal spending will climb 8.4% in 2022, including a more than 7% boost to China’s defense budget. The government plans to draw on savings from previous years to pay for the rise in expenditure, with the budget deficit targeted to fall to 2.8% of gross domestic product this year.
Finance Minister Liu Kun said nearly 1.27 trillion yuan in funds held over from previous years by the central government will be added to the general budget this year.
Much will depend on whether Beijing can encourage local officials to launch more infrastructure projects.
“China set a target that requires some effort to achieve, unlike last year, which was too low and weakened local governments’ motivation to do things,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered PLC. “The target is still within the range of China’s potential growth rate, and requires policy support and efforts by local governments.”
Bloomberg economists Chang Shu and David Qu say that the message from the National People’s Congress is clear: China’s government is determined to prevent growth slipping too much this year. The 5.5% growth target — down from 6% in 2021 — signals an intent to stabilize an economy facing fierce pressures from a property slump and new risks from the Russia-Ukraine war. The budget targets look conservative on the surface — but leave substantial room for stimulus that could be even more forceful than the support it delivered in 2020 to cushion the pandemic blow.
Liu Rihong, a senior official at the State Council Research Office, said China had plenty of room to boost investment.
“Expanding investment at the current stage does not mean China is returning to its old path of extensive development and relying on big-ticket projects to boost economic growth,” Liu told reporters Saturday in Beijing.
Premier Li reiterated Beijing’s commitment to controlling overall debt levels in the economy, and said the amount of bonds available for local governments to fund specific projects would be set at 3.65 trillion yuan, the same as last year. The government will also set up a fund to ensure financial stability and prevent systemic risks, he said, without giving details.
The government also declined to set a new hard target for energy use, as it usually does to meet long-term emissions goals, suggesting its more immediate focus is on stimulating GDP growth.
“The target of around 5.5% growth is not easy to achieve, and requires more proactive policy support,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. “Investment, especially infrastructure investment, will be the most important and reliable driver to stabilize growth this year.”
Housing market
The ability of China to meet its growth target this year will also largely depend on whether policy steps to stabilize the housing market are effective. Dozens of Chinese cities have made it easier for residents to obtain mortgages or lowered down payments required for housing since the beginning of the year to encourage more home sales.
“The growth target of 5.5% is aggressive, implying that the government is willing to do more to arrest the property slump,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group. “The Ukraine crisis presents a new external risk, notably food-energy security. This cannot be addressed by interest rate or reserve requirement rate cuts. The authorities will need to launch more measures to address the supply side constraints.”
The government kept its language around monetary policy largely unchanged, while pledging to “step up implementation.” Zhou Hao, senior emerging markets economist at Commerzbank AG, said that suggested the central bank will cut interest rates multiple times. His base case is one 10 basis-point cut in the one-year policy rate in the second quarter, with the possibility of more.
China’s monetary stimulus puts it in sharp contrast with the U.S. and other developed nations, which are hiking or preparing to hike interest rates to curb rampant inflation. Beijing kept its inflation target unchanged at around 3% for this year, although recent consumer price data has been more subdued than that.
The central bank has already cut interest rates this year and vowed to keep policy flexible and responsive to changing economic conditions. The government hasn’t set a GDP target under 6% since 1991. No target was set in 2020, when the pandemic caused growth to slow to 2.2%. The economy expanded 8.1% last year.
The monetary policy stance “remains prudent but with a more dovish bias,” said Liu Peiqian, chief China economist at NatWest Group PLC. She forecast another 20 basis-point reduction in the benchmark interest rate and 100 basis-point cut in the reserve requirement ratio this year. “There is room for stronger policy support if loan growth is soft,” she said.
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