SUMMARY
- As expected, Beijing set a target for real GDP growth for 2024 of “around 5%” but without the forceful stimulus measures necessary to decisively secure that goal; Beijing may need to a new round of stimulus at midyear, especially given that the property sector shows no signs of hitting bottom.
- Nominal growth this year will likely remain anemic given deflationary pressures and the lack of strong measures to boost consumption and broader end-demand; the resulting drag on corporate revenue and profit growth will continue to weigh on the outlook for equities.
- Property support will remain incremental, with Beijing signaling no appetite yet for comprehensive measures to restructure developer debt; there are also few signs of ambitious new structural reforms in the works, so a “third plenum” meeting is unlikely to be a major market catalyst.
On Tuesday, Premier Li Qiang laid out China’s growth and stimulus targets for 2024 in his government work report to the National People’s Congress. The announcements, including the target for real GDP growth of “around 5%” this year, met the subdued expectations in our preview report (link HERE), with few major positive or negative surprises.
While China’s leadership is keen to revive confidence, it is sticking to a playbook of moderate stimulus and a priority of supply-side measures to advance industrial policy goals rather than aggressive steps to boost domestic demand. That policy platform will not quickly revive private sector confidence given the headwinds from the ongoing property downturn, indebted local governments, and deflationary pressures.
Main investment takeaways for coming quarters:
- The macro backdrop for Chinese equities will remain challenging given anemic nominal growth and its drag on revenue and profit growth.
- Chinese consumers will continue to spend on services but be cautious when it comes to major goods purchases; Beijing’s stimulus strategy will not do much to address household concerns over weak income growth and falling property prices.
- The broad outlook for China’s commodities demand is mixed. Metals will receive some support from Beijing’s push to sustain investment in infrastructure and advanced manufacturing (such as electric vehicles) but also face downside risks from the continued weakness in the property sector and overcapacity in clean tech as well as steel. The balance between these factors of course depends on the specific commodity.
- China will continue to be at least mildly deflationary/disinflationary for the rest of the world through export prices and the impact of muted demand on global commodity prices.
- Trade tensions and concerns will grow in advanced economies over the risks of Chinese overcapacity in clean tech (EVs, batteries, solar) and potentially new areas such as mature semiconductors; the work report noted domestic overcapacity as an issue but did not pledge strong measures, and China’s leadership will continue prioritize investment in strategic sectors.
Below are further details on key takeaways from the report.
Real GDP growth target of 5% is challenging; nominal growth to remain anemic
Our preview note observed that Xi’s economic team faces a tension between (1) seeking to boost growth and confidence; and (2) adhering to Xi’s mantra of “high quality development,” meaning financial discipline and a focus on strategic industrial policy. For a sense of where Xi’s priorities are, the work report ranked boosting domestic demand as only the #3 “major task” for the year (it was #1 last year), behind industrial modernization and science and education.
The policy mix laid out in the work report reveals that tension and is consistent with our basecase of a “weak 5%”: Beijing set an ambitious growth target of “around 5%” but not backed by very forceful stimulus. Achieving 5% growth with the stimulus outlined thus far will be difficult, given:
- No signs that property is bottoming out. For example, large property developers reported a 60% drop in sales in February according to CREI data.
- Uneven policy implementation. Li’s work report repeatedly stressed effective coordination but this has not been the case over the last year, particularly at the local level. Provincial officials are torn between Xi’s conflicting directives to support growth and to guard against financial risks.
- Optimistic assumptions by planners. Details suggest Beijing continues to underestimate the challenges. For example, the nominal target for the budget deficit seems to imply inflation (measured by the GDP deflator) of 2% this year, which would be a major (and unusual) swing from last year’s deflation of -0.5%.
The upshot is a significant risk that growth momentum fades by mid-year, requiring additional stimulus measures. Beijing has left open the window for more support (such as hints of additional bond issuances, noted further below), but the actual willingness to add stimulus will (as with last year) keep markets and the broader economy in suspense.
Even with further support mid-year, real growth could come in below the 5% target. The “around 5%” framing suggests the leadership would tolerate growth of 4.8% or even a bit below. And nominal growth – which is key for a recovery in corporate revenue and profits and thus the equity market – is unlikely to be much higher than the 4.6% rate of 2023 given deflationary pressures and the lack of strong demand-side support.
Beijing’s attachment to annual 5% targets won’t relax easily. Huang Shouhong, the head of the State Council’s Policy Planning Office, told an NPC conference that China needs around 5% growth through 2035 to achieve its development goals. This is not a new target but it is one that looks increasingly implausible. Nonetheless, the comment suggests that Beijing will also look to target 5% growth in 2025.
Modest bump in fiscal support
Assessing the fiscal outlook is always tricky given Beijing’s confusing budget accounts. The big picture is that fiscal stimulus is set for a modest bump, as the central government increases support for infrastructure investment to offset the financial woes of local governments:
- The target for the general budget deficit is 3% of GDP, the same as in 2023
- The quota for local governments’ special bond issuance (used to finance infrastructure) is slightly higher than last year, CNY 3.9 trillion compared to CNY 3.8 trillion
- For additional infrastructure support, the central government will issue CNY 1 trillion (0.8% of GDP) in “ultra long-term special treasury bonds” which do not count against the official GDP target. This issuance was long-rumored and expected by markets. The work report language suggests a willingness to consider additional issuance later this year – which may indeed be necessary to hit 5% growth – but no details. The special treasury bonds will help finance major infrastructure projects that meet Beijing’s strategic priorities. This is not a pot of money that can be used by local governments for property projects or municipal infrastructure. There will be a high level of scrutiny from Beijing and as a result the process of approving proposals could be slow.
Based on the above, Bloomberg Economics expects the broad budget deficit to be as high as 7.2% of GDP, compared to 5.9% of GDP as laid out in the 2023 work report. However, an even broader definition of the fiscal deficit – including off-budget spending by local government financing vehicles (LGFVs) – will probably be only modestly higher than last year. LGFVs face high debt servicing costs and tight constraints from Beijing on new borrowing. The continued collapse of land sales to developers deprives local governments of a critical source of revenue. Infrastructure investment is off to a slow start this year for these reasons.
Other key takeaways:
- No breakthroughs for consumption support. The work report repeats recent pledges to spur consumption, including through subsidizing upgrades of appliances and autos. But there are no funding announcements attached to these initiatives. With local governments strapped for cash, and support from the central government largely going to infrastructure and to help meet basic expenses like salaries, the macro impact is likely to be limited. The key constraints to boosting consumption are slow growth in household income (due to a weak job market) and declining property prices. Beijing’s stimulus strategy does not provide forceful steps to address either area.
- The language on the property sector implies only incremental easing, and not the kind of comprehensive effort to restructure developer debt that is probably necessary to revive confidence of homebuyers and creditors. Beijing is intent to move to a new model for real estate, with a greater role for government-funded affordable housing, rather than rescue private developers.
- The work report only contains broad language on monetary policy, but the signals are consistent with other recent messaging: there is scope for modest easing but no sign that Beijing will try to engineer a major boost to the credit impulse. The focus is less on the quantity of credit growth than ensuring it goes to sectors favored by Beijing, such as clean tech and innovation programs.
- Language on support for the private sector, including platform companies, was positive but repeated sentiments expressed over the last year. Likewise, there was little new with respect to Beijing’s policies to support the equity market and we don’t expect major changes in policy.
What comes next:
- Expect few major announcements from the rest of the NPC. The NPC closes on March 11. Most of the remaining agenda will focus on legislative proposals but interviews by ministers may add color to the policy outlook. Xi’s comments at the NPC, including a short closing address on the final day, will be worth monitoring for high-level political signals. The main even to close the NPC has traditionally been a press conference by the premier, but Beijing has cancelled that for the first time since 1993 – a move that reflects the further diminishment of the premier’s role as Xi Jinping has centralized power and decision-making.
- A “third plenum” may be coming but is unlikely to be a major market catalyst. Beijing will at some point – perhaps even in March/April – hold a long-delayed “third plenum” meeting that by the typical political calendar should have taken place last fall. While these meetings have in previous eras been the occasion to lay out the medium-term economic reform agenda, we continue to caution against high hopes of a new program that would serve as a major catalyst for markets (see our discussion in a recent note HERE). The NPC work report reaffirmed that few, providing few signals of big new reform ideas brewing.
With thanks to Houze Song for his insights.
