China - Impressions from the Annual NPC

China Macro: 2023 growth forecast in line with our expectation

China’s growth targets are traditionally announced at the annual meetings of the National People’s Congress (NPC), scheduled for 5-13 March this year. At the start of the meeting, departing Prime Minister Li Keqiang announced a growth target of ‘around 5%’ for 2023. This was in line with our expectation (see our recent China update here), but a bit below the consensus expectation of ‘above 5%’. We think the government has on purpose been a bit cautious with its growth target for a couple of reasons. First, although headwinds from Zero-Covid and property sector distress are fading, China is still faced with an uncertain external environment. Growth in foreign demand is slowing as developed economies feel the impact of unprecedentedly sharp monetary tightening. What is more, tensions with the US (on tech, Taiwan and China’s position versus Russia) remain elevated and are increasing on some points. Second, the government does not want to risk missing its growth target for another year, after it missed the 2022 target of 5.5% by a wide margin. China’s growth rate in 2022 came in at a meagre 3%, driven down by the combination of Zero-Covid policy and Omicron flare-ups and property sector woes. Meanwhile, Beijing’s ‘around 5%’ target for 2023 is close to our forecast of 5.2%.

Policy stance will be supportive, not abundant

Other impressions gained from the NPC so far are in line with our view that Beijing will prioritise safeguarding economic growth, while keeping policy support ‘piecemeal’ and targeted rather than abundant/agressive. The government looks confident that there will be a natural strong rebound following the exit from Zero-Covid, with no need for aggressive stimulus. That partly reflects the longer-term goals of keeping overall leverage in check and avoiding the overheating issues that arose after China’s rapid rebound following the original Covid-19 shock in 2020. More specifically, on the fiscal front, the budget deficit target was raised to 3.0% of GDP in 2023 (2022: 2.8%), with the broader consolidated deficit expected to be kept at around 7.5% of GDP. Infrastructure investment – typically used by Beijing as an instrument to ‘lean against the wind’ – will likely slow again, now that the economy is stabilising. On the monetary policy front, the inflation target was kept unchanged at 3%, with piecemeal easing (including an RRR cut later this year) and targeted support to safeguard liquidity and special lending programmes likely being maintained. Specific policies to support private consumption will also remain on the menu, as illustrated by recent measures taken at the local level to boost car sales.

Self-reliance, restoring confidence, and regulatory reform

Earlier this week, President Xi Jinping – who will gain an historic third presidential term this week – highlighted the importance for China to increase self-reliance to safeguard its development in high-tech manufacturing, thereby pointing to the role of SMEs in innovation. This should be seen against the background of tensions with the US stepping up specific restrictions (including export restrictions for the most advanced semiconductors and related machines) to slow down the rise of China as a tech power. In this light, it is also interesting to see that Beijing seems to prioritise the restoration of confidence amongst private firms and investors, reducing the likelihood of another regulatory crackdown for the moment. Meanwhile, an overhaul of the regulatory framework was presented. The banking and insurance regulator will be absorbed by a newly formed institution that will oversee all financial sectors except the securities industry. The new regulatory framework, partly based on the Australian model, should help to strengthen the coordination of supervisory policies and mitigate the risks of regulatory arbitrage.