Wednesday, August 10

China’s GDP Target Will Be Challenging to Meet, Economists Say


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China’s goal to achieve around 5.5% economic growth this year is a challenging one, and will push the government to boost infrastructure investment, stimulate property demand and provide more monetary easing, economists say.

The gross domestic product target is higher than economists’ projection of 5.1% expansion for this year, a growth rate that would be the lowest since 1990, excluding the pandemic year of 2020. The economy grew 8.1% in 2021, when the government set a conservative target of “above 6%.”

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Here’s a look at what economists are saying about Beijing’s goals, which were released at the opening of the National People’s Congress on Saturday:

Jacqueline Rong, deputy chief economist for China at BNP Paribas SA

“The current growth momentum of the economy is likely lower than 5.5%,” Rong said. “More support from the monetary policy will still be needed.”

She expects the People’s Bank of China to cut the medium-term lending facility rate by 5 basis points in April or May, and lower the ratio of funds banks must keep in reserve by 50 basis points in the second half of the year.

“Even though the focus is on stabilizing growth this year, it doesn’t mean the government will abandon risk prevention and adjustment of economic structure altogether,” Rong said. “The 2.8% budget deficit ratio was obviously set for the sake of medium- to long-term fiscal policy sustainability.”

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The deficit target is lower than economists’ median forecast. Rong estimates 3 trillion yuan ($475 billion) to 4 trillion yuan worth of fiscal funds will be carried over from previous years and used to replenish income this year. “So fiscal support for the economy will remain strong even though the budget deficit doesn’t expand,” she said.

Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.

“It will be a challenging year for the government to achieve this growth target. The housing sector is slowing down, and the Covid pandemic has constrained the service sector severely,” said Zhang. “It is not clear how much infrastructure investment can grow in 2022 to offset such adverse effects from housing and Covid.”

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The PBOC will likely cut the reserve requirement ratio for banks in the first half of the year, and lower policy interest rates twice in 2022 by 10 basis points each time, Zhang said. The government will probably allow local authorities to relax property curbs, he said.

The government’s vow to “effectively guard against overseas risks” reflects its awareness of potential geopolitical problems, made clear by the Ukraine crisis and the sanctions on Russia, Zhang said.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc.

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 Shuang. “It requires policy support and efforts by local governments.”

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“The target is still within the range of China’s potential growth rate,” he said, referring to the the maximum the economy can expand without fueling inflation. The PBOC projected the economy’s potential growth rate is 5%-5.7% in the five years through 2025.

Chang Shu and David Qu, Bloomberg Economics

“The message from the National People’s Congress is clear — China’s government is determined to prevent growth slipping too much this year,” the economists said in a report. “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.”

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“The 5.5% growth target — in line with our expectations — strikes a good balance: it’s not so high as to require shifting already-stimulative policy into overdrive, but not too low, either — which would undermine confidence.

Liu Peiqian, chief China economist at NatWest Group Plc.

The reduced budget deficit signals “fiscal discipline,” while the unchanged local government special bond issuance quota will “continue to lift the infrastructure investment lever for the medium term,” Liu said.

The monetary policy stance “remains prudent but with a more dovish bias,” she said, forecasting 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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Zhou Hao, senior emerging markets economist at Commerzbank AG

“Growth in the first half of the year will depend on infrastructure and property, driven by the remaining special bonds issued last year and greater housing demand in smaller cities,” he said. “In the second half of the year, we’ll have to see if the government can relax virus control measures a bit so that domestic demand can catch up.”

The government’s pledge to “step up implementation of the prudent monetary policy” means the PBOC will cut interest rates multiple times but with a smaller reduction each time to ensure stability, he said. His base case is one 10 basis-point cut in the one -year policy rate in the second quarter, with the possibility of more.

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Qu Hongbin, chief China economist, HSBC Holdings Plc

“Given the current slowdown pressures facing the economy, China’s 2022 growth target of around 5.5% will mean more policy support is needed to engineer a growth rebound in the coming quarters, with GDP growth close to pre-pandemic levels by the second half (we expect GDP growth can recover to around 6% in the second half),” Qu wrote in a note.

“To achieve this, more accommodative fiscal and monetary policies, particularly targeted support for technology and manufacturing, SMEs and green development will be rolled out this year. Curbs on the property sector will likely see some relaxation too.”

Larry Hu and Xinyu Ju, economists at Macquarie Group

“The bottom line is, the ambitious growth target means that the year of 2022 will be another year of leveraging up,” the economists wrote in a note.

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“The growth target announced today suggests that: (1) The credit cycle is on up-turn in China; (2) The Chinese economy will likely start improving as early as the second quarter.”

There’s also more evidence that “regulation is not the top priority for policy makers,” the economists said. The government didn’t disclose a target for energy consumption and notably, didn’t mention the property tax, they said.

In addition, policy easing will not be constrained by the Russia-Ukraine tensions, they said.

Lu Ting, chief China economist at Nomura Holdings Inc

“In our view, the GDP growth target is too high to realistically achieve, while the fiscal support measures appear somewhat timid,” Lu and colleagues wrote in a note.

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“Despite a transfer of fiscal stabilization funds worth 2.3 trillion yuan and a promise to increase fiscal spending by 2 trillion yuan to speed up fiscal spending growth, a sharp decline in land sales revenue this year could result in close to zero growth in total government spending .”

“In our view, a fiscal revenue growth target of 3.8% is quite ambitious in light of the ongoing growth slowdown, especially considering fiscal revenue growth was -8.1% year on year in the fourth quarter of 2021.”

“Even with the planned 18% increase (1.5 trillion yuan) in transfer from the central government to local governments, we expect many local governments in lower-tier cities to face severe financial difficulties due to slumping revenues from property sector-related taxes and land sales.”

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