China: NPC economic targets reaffirm our subdued outlook for growth and stimulus

SUMMARY:

• Beijing set a notably conservative 2023 GDP growth target of “around 5%” and moderate stimulus policies, underscoring that longer-term financial stability continues to outweigh pursuit of high short-term growth; this policy orientation reaffirms our expectation of a recovery led mostly by services, with fewer positive spillovers to global growth than in past cycles driven by investment stimulus.
• Beijing continues to signal a message of reassurance to the private sector and platform companies but little in the way of comprehensive changes to the business environment or reform agenda; language on geopolitical tensions was subdued, though US-China competition is the backdrop to Xi’s broad economic security agenda and central focus on domestic innovation.
• Other coming events at the NPC will be important for China’s policy outlook, including institutional reforms to be announced 7 or 8 March and the appointment of the full economic team on 12 March.

On Sunday, the annual National People’s Congress opened with premier Li Keqiang delivering the government work report for 2023. Our NPC preview note [link HERE] had anticipated that Beijing would set a conservative growth target for 2023 and outline disciplined stimulus measures. That was indeed the case, with the growth target (“around 5%) coming in even a bit more cautious than the floor of “above 5%” that we anticipated. Other macro targets were in line with our expectations and there were few surprises in the work report, with Beijing striking a tone of overall consistency on regulatory policy, reform priorities, and geopolitics. More news will come from the NPC over the next week, including a likely financial regulatory overhaul and appointment of a new economic team.

Macro policies: Long-term stability over short-term growth

The GDP growth target for 2023 is “around 5%”, compared to our forecast of “above 5%.” China’s leadership will likely aim in practice for a floor of 5% barring a major shock. Still, the unambitious target drives home the extent to which Beijing is conscious of headwinds to the outlook this year (including weak exports, strained local government finances, and fragile private sector confidence) and is intent to avoid exacerbating debt risks to deliver high growth.

The low target is likely to be disappointing to the markets, especially sectors linked to investment stimulus. Media reports and market commentary in recent days had pointed to a growth target as high as 6%. We were skeptical, noting that while recent economic data has been positive, Beijing was more likely to view that as a reason to stay disciplined in its stimulus policies rather than to shoot for higher growth (please see: Final thoughts heading into the NPC meeting, 3 March 2023).

The narrative on China continues to overlook that while Xi Jinping cares about the economy – especially this year – he remains more focused on his long-term agenda for China than pursuit of short-term growth goals, particularly if the latter worsens systemic risks. For Xi, a return to normalcy for the economy this year is apparently enough. The low target also implies that Xi’s new economic leadership team, which takes office at the NPC, will bring more continuity than change when it comes to key macro policy settings.

Implications: Beijing will take stronger growth if it comes, but that will be the result of the rebound in private sector activity rather than aggressive investment-driven stimulus. This policy orientation reaffirms 22V’s outlook for 2023: consumption and services, rather than industry and investment, will drive China’s recovery this year. This means smaller positive spillovers to global growth this year – especially for iron ore and other assets linked to the investment cycle – than in previous rebounds (please see: What could go wrong for in 2023, 29 January 2023). Even consumption of big-ticket items faces constraints given limited direct fiscal support for households (see further below).

Other key macro targets and policies:

• The fiscal deficit target is 3% of GDP, in line with our expectation. That compares to a deficit target of 2.8% in 2022. China’s government – while keen to boost consumption – is still reluctant to provide direct fiscal support such as cash payments to households. The central government will increase transfers to local governments and encourage localities “where conditions allow” to provide subsidies for green appliances and other energy-saving measures, but the scale will likely be modest. Implications: Limited direct fiscal support is another reason to think that China’s consumption rebound, particularly for big ticket items, will be modest (see Avoid excess optimism about “excess saving”, 16 January 2023).
• The quota for local government to issue special bonds for infrastructure construction is RMB 3.8 trillion, in line with our expectation. That is slightly lower than actual issuance in 2022 (RMB 4.2 trillion including funds carried over from 2021). Implications: with local government finances still constrained by weak land sales, growth in infrastructure investment will likely slow relative to 2022.
• The unemployment rate target of “around 5.5%” met our expectation but is a little softer than in 2022 (“below 5.5%”). Implications: Beijing is eager to boost job creation but somewhat cautious about how quickly employment – a key driver of household consumption – can recover this year.
• The description of monetary policy was brief, taking the relatively restrained tone that “prudent monetary policy will be precise and forceful” without reference to keeping liquidity conditions ample or some other recent formulations. Recent PBOC messaging has also stressed that policy must be sustainable. Implications: Monetary and credit policies will stay accommodative but further easing will be through targeted measures and there is a risk of policy tightening if the recovery gains momentum or speculative pressures increase. PBOC will be focused on keeping borrowing costs low for the real economy while limiting financial risks.
• The key language on property policies says: “We should ensure effective risk prevention and mitigation in high-quality, leading real estate enterprises, help them improve debt-to-asset ratios, and prevent unregulated expansion in the real estate market to promote stable development of the real estate sector.” As anticipated, this implies that Beijing will continue measures to boost financing for relatively healthy property developers and to complete stalled housing projects while avoiding a broad bailout of the sector. Beijing aims to stabilize property activity but not to promote an aggressive rebound, which is unrealistic and undesirable to the leadership as it looks to move to a more conservative and smaller role for the sector in driving China’s growth. Implication: While property sales and prices show early signs of a recovery, new investment in property will continue to lag as the sector goes through a deep restructuring.

Regulatory policies and geopolitics:

The work report brought few surprises in terms of domestic policy or geopolitics. Beijing is eager to boost confidence, domestically and internationally, but not to budge off Xi’s broader agenda, including maintaining tight Party control domestically and an assertive foreign policy to counter challenges from the United States.

• The work report continued a recent tone of reassurance to the private sector. There are pledges to protect property rights for entrepreneurs but few details. There was also relatively little new in the broad structural reform agenda.
• The work report took a constructive tone on supporting the digital economy, including platform companies. This is consistent with our view that regulatory tail risks for Chinese tech companies are low this year, so long as they do not challenge Xi’s political or regulatory agenda.
• Common prosperity was barely mentioned, another sign that Xi is deemphasizing this initiative – for now – given the potential to increase private sector anxiety. Common prosperity isn’t going away but is more technocratic in goals than is sometimes feared.
• Tensions with the United States were not mentioned directly, but figure prominently in how Beijing sees the external environment and China’s corresponding challenges: “Uncertainties in the external environment are on the rise. Global inflation remains high, global economic and trade growth is losing steam, and external attempts to suppress and contain China are escalating.” Beijing’s strategy to address containment is through continuing to promote trade and investment deals – expanding China’s economic influence and making decoupling harder – while racing to boost resilience to US technology controls and other coercive measures (see next bullet).
• Industrial policy and innovation are critical priorities for Xi and will continue to focus on boosting China’s technological self-reliance and supply chain resilience in the face of tensions with the United States. More news on plans to overhaul these policies will likely come this week (7 or 8 March) as part of the government restructuring that Beijing will announce at the NPC. The need to balance development with economic security (which also includes food and energy security) is a central theme of Xi’s third term.
• Language on Taiwan was consistent with other recent high-level messaging, as Beijing looks for opportunities to stabilize cross-Strait relations. The work report included reference to promoting “peaceful reunification” with Taiwan, a staple of past reports but which had been omitted last year. This does not suggest Beijing is going soft – the language against Taiwan independence and “foreign interference” (from the US) remains strong, while China’s military also continues aggressive saber-rattling such as regular incursions into Taiwan’s airspace. But political messaging is in something of a holding pattern. China’s leadership is looking to Taiwan’s January 2024 election in hopes that it may bring a return to power for the KMT party, which has been in favor of engagement with China, and in the meantime Beijing will be wary of taking steps that undermine the KMT’s electoral chances. Xi also appears to have tasked Wang Huning, China’s ideological czar, with reviewing China’s Taiwan policy and potential tweaks to facilitate engagement with Taipei.

What to watch next:

Beijing has now released the schedule for the rest of the NPC, with key events below (items in bold have direct relevance to markets):

• 7 or 8 March: Beijing will unveil proposed governance reforms, including an overhaul of the financial regulatory apparatus and industrial policy apparatus (for more details see our earlier preview report).
• 10 March: Election of China’s president (Xi Jinping), vice president, and chairman of the NPC (Zhao Leji). The vice president selection will be interesting to see but with relatively little directly relevance for markets.
• 11 March: Premier Li Qiang will be appointed.
• 12 March: Appointment of China’s vice premiers and heads of agencies. This will reveal the full makeup of the new economic team, including posts such as central bank governor and heads of the financial regulators (see our preview report for more).
• 13 March: Close of the NPC, to include a speech by Xi.