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China’s “Two Sessions” in 2023 kicked off. As the first highlight, Premier Li Keqiang announced the economic growth target for this year – about 5% in the government report.
For most countries in the world, especially developed economies, 5% is an extremely impressive growth rate. However, after years of double-digit growth rates in China, the growth rate has gradually dropped to single digits in the past ten years. In the economy, many factors have caused the annual growth target to be erratic in recent years.
Before 2011, China’s GDP growth target was of little reference: it was set at 7% for six consecutive years before 2005, and it was set at 8% for seven consecutive years since 2005. In the past 13 years, the actual GDP has almost been falling Significantly exceeded the set goals. For example, the target for 2007 is 8%, and 13% will be completed eventually.
After Li Keqiang became the prime minister of China in 2013, the annual growth target began to fluctuate, and it is of great reference value-in the eight years before the outbreak, the actual GDP growth of each year was not much different from the target set that year, and the biggest difference was 0.5% per year.
At the beginning of taking office, Li Keqiang expounded the significance of setting a GDP growth target in a public speech—in order to guide social expectations and set a reasonable range for economic operation, the lower limit is the annual GDP growth target, which is calculated based on employment. The growth rate is to maintain employment; and the upper line is the price index (CPI), which cannot be over-stimulated, causing excessively high prices and affecting the lives of residents.
However, in 2020 when the epidemic hit, China did not set a GDP growth target for the first time in more than 30 years; in 2021, the target was set at 6%, and the actual growth rate was 8.4%, which was 2.4% overfulfilled; in 2022, it was set at 5.5%, but because of Repeated city closures only achieved 3%, a drop of as much as 2.5%.
As soon as this year’s 5% target was announced, it immediately attracted widespread attention. On the one hand, the value was lower than the predictions of almost all institutions and economists; .
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Consumption is a difficult point in post-epidemic economic recovery. According to the analysis, the recovery of China’s service consumption will be significantly faster than that of commodity consumption.
Signal 1: recovery starts, return to normal
Experts surveyed generally believe that the 5% target is too conservative. According to Chim Lee, a China analyst at the Economist Intelligence Unit (EIU), the agency expects China to easily exceed the 5% target, with real GDP growth expected to reach 5.7%.
Zhuang Tailiang, an associate professor of the Department of Economics at the Chinese University of Hong Kong, believes that this year is a year for China’s economic rebound. In fact, it should exceed 6%, or even 7%.
There are two reasons for such an optimistic forecast. Zhuang Tailiang said that after the epidemic is over, people will start to flow, which will bring about a recovery in consumption such as transportation, accommodation, tourism, and retail. This is a natural rebound.
The data support this judgment. According to the value-added tax invoices given by the State Administration of Taxation of China, the sales revenue of consumption-related industries during the Spring Festival this year has soared by 12.2% compared with last year.
CITIC Securities further stated in the research report that the recovery of service consumption will be significantly faster than commodity consumption.
Service consumption refers to haircuts, watching movies, concerts, etc. Consumption in these areas has been strongly suppressed during the epidemic, and there has been a retaliatory rebound after the liberalization. For example, in January this year, the box office of Chinese movies exceeded 10 billion yuan, setting a record for the highest box office in January over the years.
The second reason for optimism is the low base effect. Zhuang Tailiang introduced that China’s economy will slow down in 2020, with an actual growth rate of 2.2%, and a strong recovery in 2021, reaching 8.1%, with an average growth rate of 5.1% in the past two years; The average growth rate in 2023 is around 5%, so the actual growth rate this year will be 7%.
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Signal 2: There are many difficulties and strong sequelae
Economists are so optimistic, but why is the government setting such conservative targets?
Because the aftermath of the epidemic on the Chinese economy cannot be underestimated. High-intensity epidemic prevention lasted throughout the year. The increase in fiscal stimulus was not in previous fiscal arrangements. At the same time, the Chinese government cut taxes and fees in order to stimulate the economy. The sluggish property market caused the government to reduce land sales revenue. Local government finances are tight.
The budget announced at the “Two Sessions” revealed that the revenue from land sales in the coming year is expected to remain sluggish. The revenue from government-managed funds, mainly land transfer fees, will drop by more than 20% in 2022, shrinking to 7.8 trillion yuan, while In 2023, this revenue is only expected to increase slightly by 0.4%.
In last year’s government work report, Li Keqiang encouraged local governments to focus on maintaining economic growth, but this year asked them to prevent debt accumulation, pointing out that some local governments have serious budget imbalances.
Li Ziqian believes that the momentum of a strong recovery in consumption will eventually fade. In the short to medium term, the most concerned thing is whether fixed investment can recover. The main driving forces behind it are infrastructure, real estate and manufacturing. Among them, even if property prices rise this year, the main driving force for the rebound is second-hand housing transactions, not the construction and sales of new housing, and it is the latter that promotes fixed investment.
This reflects the dilemma of local governments – the government sells land at high prices to obtain fiscal revenue and fund public investment. If the real estate industry is strictly regulated, government revenue will be greatly affected; if the regulation is not in place, the industry will accumulate a large amount of debt, which will easily cause financial risks.
Therefore, in the long run, local governments in China may have to seek other sources of fiscal revenue, such as property taxes, to offset volatility in the real estate market.
A nationwide property tax has been in the works in China for more than a decade, but has faced resistance from stakeholders, including local governments themselves, who fear it will erode property values or trigger a market sell-off.
The “Two Sessions” has not yet appeared any voice on property tax discussions.
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The lower economic growth target may mean that the government will not relax previous regulatory measures, which is not good news for the Internet and real estate giants.
Signal 3: Supervision will not be relaxed, stimulus will not be blind
Despite the above-mentioned difficulties, the 5% target is set low enough, coupled with the considerable recovery achieved in the first two months of this year, the moderate increase in the fiscal deficit and the planned issuance of 3.8 trillion yuan of treasury bonds, all of these factors remain open for the Chinese government. enough room for error.
This space is very useful.
Li Ziqian believes that from the outside, it gives the government a lot of flexibility to deal with any “black swan” incidents, such as incidents like “Balloon Gate”.
From the inside, this year is Xi Jinping’s third term and the first term of the new Premier Li Qiang, especially Li Qiang, who needs space to prove himself.
On the economic level, this space can be used to solve structural problems, instead of blindly stimulating the economy and aggravating existing problems, such as the high debt of local governments.
During the “two sessions”, the official statement also revealed this intention. Zhao Chenxin, deputy director of China’s National Development and Reform Commission, said that the expected target of about 5% is in line with the trend of economic operation and the law of economic development, and it is also conducive to guiding all parties to pay more attention to improving the quality and efficiency of economic development.
Therefore, the market cannot expect the government to further strengthen the stimulus to the property market in addition to the existing policy mix. The government work report again warned against “disorderly expansion” of the industry, suggesting deleveraging will remain a theme.
“On the contrary, it is possible to further strengthen the control of the economy, such as the reform of financial regulatory agencies that has just occurred (the establishment of the State Administration of Financial Supervision and Administration, the National Data Bureau, etc.).” Li Ziqian said that the Prime Minister’s media meeting on March 13 may Some signals will be released, but the actual policy will likely be announced at the Third Plenary Session of the 20th CPC Central Committee, which is expected to be held in the fourth quarter of 2023.