In this year’s Chinese government work report, the expected economic growth target is set at 5.5%.
The government work report stated that the main consideration for setting this goal is to stabilize employment, protect people’s livelihoods, and prevent risks and that it should be linked to the average economic growth rate in the previous two years and the requirements of the 14th Five-Year Plan. “This is a medium-to-high-speed growth on a high base, which reflects the initiative”. Some foreign media believe that China’s economic growth target of about 5.5% is too high, and its economic prospects are “not optimistic.” Many Chinese researchers agree with that, believing that achieving this year’s economic growth target is challenging. In this regard, the market does not completely acknowledge the concept of generating confidence and enhancing expectations with high goals, but more real policy promotion is required to truly support the development of the economic environment.
Considering the current complex environmental changes both within and outside of China, researchers at ANBOUND believe that achieving this year’s economic growth target should not be overly optimistic and requires a full estimation of the complexity of the current economic operation. ANBOUND has always believed that China’s economy needs to maintain a certain growth rate to solve various deep-rooted problems and achieve stability in overall economic and social development. Therefore, “stable growth” has always been the core requirement of China’s economic policy. Under such circumstances, maintaining a stable economic growth target is also an inevitable need to achieve this “stable growth”, and in such context, setting an economic growth target of 5.5% is “achievable”. The focus of the problem is how to achieve a challenging target. The former official of the China Finance Office also stated that, “this is a goal that requires a lot of effort to achieve”. This implies that to attain the aim of economic growth, China cannot rely just on the endogenous driving power of the economy, but will also require increasing assistance from various policies.
According to the Central Economic Work Conference at the end of last year, China’s economic development would face triple pressure in the near future from demand contraction, supply shocks, and deteriorating expectations.
From the current inflation data and PMI data, there is still no fundamental change in the development of China’s economic situation, and under the pressure, the economic trend of “low in the beginning, high in the end” this year has not changed. The economic operation is still in the process of a soft landing, as expected by ANBOUND.
Recently, The Wall Street Journal published an article analyzing the current difficulties facing China’s economy. There are roughly several factors restricting economic growth: the slowdown in consumption caused by the COVID-19 pandemic, the impact of the slowdown in the real estate market on investment, and the impact of the Russia-Ukraine conflict on energy supply. It was pointed out that in the fourth quarter of 2021, China’s economy grew by only 4% year-on-year, and China is still facing a serious slowdown in the real estate market, as well as the adverse impact of the “dynamic zero clearance” policy on consumption due to the pandemic. The conflict between Russia and Ukraine could lead to a further slowdown in global economic growth and trade, and China’s huge trade surplus, which had been expected to narrow as developed economies reopened and consumption returned to services, is now under more pressure.
Some foreign media also believe that when China set its economic growth target for this year, it underestimated the impact of the Russia-Ukraine conflict on its economy. Goldman Sachs Group estimates that a USD 20 per barrel rise in oil prices reduces Chinese growth by 0.3 percentage points. And China’s economic growth will be dragged down by half a percentage point this year. In its report, the IMF now expects China’s gross domestic product to expand 4.8% this year, down from its previous projection of 5.7%. If this year’s economic growth objective is based on last year’s economic developments, then the emergence of geopolitical risks caused by the escalation of the Russia-Ukraine war has actually worsened the challenge of “stabilizing growth” in this year’s economy.
Of course, under varied harsh conditions, if we consider that the long-term impact of the pandemic is fading and the recovery of China’s service industry is likely to be stronger, the resilience demonstrated by China’s economy cannot be overlooked. Some scholars predict that China’s potential economic growth rate is still between 5.5% and 6%. The average economic growth rate in the previous two years did not reach 5.5% mainly due to the pandemic, and this year’s target is set closer to the potential growth level. So, whether the current economic growth target can be achieved, the most important thing is to free up policy space around achieving the potential growth rate.
At present, all parties have high expectations for the implementation of fiscal policy, especially the role of infrastructure investment. However, under the balance of “stable growth” and “risk prevention”, the driving effect of infrastructure investment on economic growth may not be optimistic. Although the official deficit forecast has been adjusted downward slightly and the amount of local government special bonds have remained stable, fiscal spending this year will still see a large increase through cross-cyclical adjustment and other means, which will help boost infrastructure investment. That said, the Wall Street Journal report also mentions that general financial conditions appear to be tightening again following a fresh tightness in the real estate market, implying that greater government expenditure may be countered by lower spending by consumers and companies.
Second, the present real estate downturn puts a lot of pressure on land transfer revenue; local government financing instruments are primarily reliant on the bond market, and rising bond market yields will put a damper on infrastructure spending.
Therefore, one of the policy concerns on how to achieve this year’s economic growth target is still to promote the recovery and improvement of consumer demand. This means that long-term policies that promote economic structural improvement and short-term counter-cyclical aggregate policies need to be combined. This requires not only fiscal policy to improve the economic structure and ensure the support of people’s livelihood, but also needs a loose monetary condition to improve consumer demand and supply. Yang Weimin, former deputy director of the office of Central Leading Group on Financial and Economic Affairs, also pointed out that the contraction in demand is mainly due to weak growth in domestic consumer demand and investment demand. While fiscal policy promotes the expansion of infrastructure investment, monetary policy and more precise COVID-19 prevention and control policies are also needed to achieve an increase in economic activity and population mobility, so as to maintain the recovery of consumption. The Wall Street Journal believes that if China wants to achieve real economic growth of 5.5%, not just growth on paper, it will need more stimulus policies, especially monetary policy stimulus. Therefore, only by “putting stable growth in a more prominent position” can this goal be truly achieved.
Final analysis conclusion:
The market cannot be blindly optimistic about the economic growth target set out in this year’s government work report. It is necessary to have a full estimate of the current difficulties and increase the support and implementation of macro and structural policies. The goal of 5.5% growth will require toils and sweats to achieve.
Writer by Wei Hongxu
A researcher at ANBOUND, graduated from the School of Mathematics at Peking University and has a PhD in economics from the University of Birmingham, UK
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