China’s lowest growth target in decades signals new era of caution

China’s political leadership set a gloomy projection for growth in the world’s second-largest economy this weekend, despite the buzz of optimism following three years of closures during the coronavirus pandemic.

Policymakers at the annual meeting of China’s rubber-stamp parliament in Beijing set a growth target of just 5 per cent for 2023, the lowest in decades and trailing last year’s Covid-era figure of 5.5 per cent, which it failed to reach.

“The reason to choose a low target is to ensure they can hit it,” said Carlos Casanova, senior economist for Asia at investment bank UBP, who described the 5 per cent figure as a “floor” that should easily be exceeded, in part because of comparisons with last year’s weakness.

China’s economy notched just 3 per cent growth in 2022 after the government imposed stringent lockdowns in big cities in an effort to stem the virus.

Even if the 2023 figure is surpassed, the government’s caution signifies a sharply changed economic environment as China emerges from the shadow of the pandemic.

Faced with a rolling property crisis, falling exports as global interest rates rise and the hangover from zero-Covid restrictions, policymakers are less concerned about a high target — a figure that has become closely watched after two decades of consistent outperformance — than with the threat of another disappointing reading.

Xiangrong Yu, greater China chief economist at Citi, suggested that Beijing was concerned about “sentiment damage in case of another miss”. The bank forecasts growth of 5.7 per cent this year.

While recent high-frequency data shows a quick recovery in activity, other indicators point to deeper systemic challenges. Property sales are declining year on year, albeit at a less severe rate than late last year, and many developers remain under pressure to restructure liabilities. Exports have fallen in each of the final three months of 2022, the latest available data shows.

“The government was taking a very cautious approach in the face of a range of uncertainties,” said Tang Yao, associate professor of applied economics at Peking University, of the growth target.

He noted that “uncertainty in the international environment” topped the list of concerns outlined by former Premier Li Keqiang, China’s number two official.

Li is set to be replaced in a government reshuffle this week by Li Qiang, a close ally of President Xi Jinping.

China weathered the early stages of the pandemic better than many of its peers, as high demand for its exports propped up the economy despite weaker consumption. In 2021 the country’s GDP expanded 8.1 per cent, though that figure was helped by the comparison with early 2020 when activity collapsed.

A significant portion of that growth was also bolstered by net exports, which are now weakening as other big economies struggle to contain inflation. Tang said that while domestic consumption would rebound this year, China could be hit by a “severe” contraction in external demand.

Dan Wang, chief China economist at Hang Seng Bank China, said the low target was “mainly a reflection of the declining exports”, given its share of growth in recent years. But she also pointed to “conservative” monetary policy, suggesting that the property market’s performance could be crucial to achieving the 5 per cent growth goal.

“In the past, whenever China’s economy was in recession, usually credit growth will pump up, and that can drive the housing cycle to go up,” she said.

“This year, even last year, there was no such intention to inflate the housing bubble.”

The prospect of stimulus in China — policymakers’ favoured response to past bouts of weakness, notably after the 2008 global financial crisis — sits uneasily with a political push to contain high debt levels.

Housing sales in China have been declining since mid-2021 following a wave of defaults among the country’s biggest developers, most notably Evergrande, though the pace of decline slowed for January and February.

Beijing is reluctant to allow local governments, which rely on land sales for much of their income, to borrow more, and has not increased the limits on how much they can raise through new bond sales this year.

Trade weakness could also affect private sector demand for credit. “The funding is often there, but private manufacturing enterprises are very reluctant to borrow to expand production because of the sharp decline in exports,” said Tang.

Nonetheless credit data in January, a month in which lending often jumps around the lunar new year, showed the highest monthly bank lending on record. Analysts attributed the surge to a rise in corporate lending.

The focus on the growth target — and its relevance to divining Beijing’s policy direction — may also wane in favour of other metrics as Xi prepares a sweeping overhaul of his administration that is expected to give him greater control over policy direction.

The government has also set a target of 3 per cent for inflation and 5.5 per cent for unemployment, which Casanova described as “aggressive”. 

“The precedent of not missing the growth forecast has already been broken,” he said. “Xi has been trying to get rid of GDP targets as his overarching measure of performance for the longest time.”