A Chinese flag flies high above The Bund.
Liu Liqun | Corbis Documentary | Getty Images
China may want a “new leap forward” in “productive forces” — but President Xi Jinping may have to resort to an old tactic to meet the country’s ambitious growth target this year, an economist warns.
Beijing set its annual growth target at “around 5%” this year in the government’s annual jobs report published on Tuesday, sticking to a deficit-to-gross domestic product ratio of 3% for 2024 — a rare upward revision to 3, 8%. end of last year.
Given a higher base result, even the Chinese government admitted that meeting this year’s target “will not be easy” – particularly as the world’s second-largest economy continues to be hit by a range of issues, from overcapacity and faltering pressures in prices to the real estate downturn and debt crisis.
“The 5% GDP target is really ambitious. Even last year, it was the first year since Covid and China achieved 5.2% (growth) mainly due to the recovery of consumption,” Wang Dan, chief economist at Hang Seng Bank (China). , he told CNBC on Tuesday.
“This year, we’re not reopening and that means unless there’s some huge infrastructure project, China will have a very hard time actually getting to 5% [target],” he said.
“When it comes to real spending, the budget deficit is just 3% this year. If we think about it, GDP growth will be around 5% — if it achieves the government’s target — and that means fiscal spending as a percentage of GDP will actually shrink.”
While there are no details, the jobs report appears to suggest that Beijing is moving away from the bazooka-like aggressive stimulus that some market watchers had expected.
“It’s mainly a contractionary rather than an expansionary fiscal policy, so I think there needs to be some kind of project of a similar size and quality to the Three Gorges Dam to really boost domestic demand,” Wang added.
The Three Gorges Dam is a hydroelectric project spanning the Yangtze River that was originally approved in the early 1990s, but only became fully operational in 2015.
China has historically resorted to building infrastructure as a short-term solution to spur growth, particularly after the financial crisis of 2008-09.
Special “ultra long” bonds.
Starting this year and “over the next several years,” Beijing said it will issue 1 trillion yuan ($138.9 billion) in “ultra-long-term” special government bonds in 2024 to finance major projects aligned with national strategies.
These bonds do not lead to the fiscal deficit and have been issued only three times before, during the Asian financial crisis in 1998, to capitalize the China Investment Corporation in 2007 and during Covid-19 in 2020, according to Erica Tan, Economist at Maybank.
Economists at Goldman Sachs said this commitment is the “most significant positive surprise” from this year’s government jobs report.
Premier Li Qiang also said 3.9 trillion yuan of special-purpose bonds for local governments will also be issued this year — 100 billion yuan more than last year.
China’s real estate problems are closely intertwined with local government finances, as they have historically relied on land sales to developers for a significant portion of revenue.
The property market tumbled after Beijing scrapped developers’ high reliance on debt for growth in 2020 – trapping some of its biggest real estate players in bankruptcy and weighing on consumer confidence and broader economic growth.
“So far, the housing market is still shrinking and the hope for a housing market recovery is almost gone, so it just leaves us with construction and infrastructure,” said Wang of Hang Seng Bank (China).
Infrastructure development is the focus of one of the 10 key government work tasks included in this year’s jobs report, which pledges to promote integrated development between rural and urban areas.
“New Leap Forward”
China’s top goal is a promise to “modernize the industrial system and develop new quality productive forces at a faster pace” — underscoring the heavy emphasis on strengthening Beijing’s industrial capacity as a long-term growth driver.
“We should give full control to the leadership of innovation, stimulate industrial innovation by making innovations in science and technology, and promote new industrialization, so as to increase the overall productivity of the factors, steadily promote new growth drivers and forces and to promote a new leap forward in productive forces,” Premier Li said at the work report, according to an official translation.
Chinese Premier Li Qiang delivers a speech during the opening of the second session of the 14th National People’s Congress at the Great Hall of the People on March 5, 2024 in Beijing, China.
Lintao Zhang | News Getty Images | Getty Images
Some of the specific industries mentioned include artificial intelligence, new energy vehicles, hydrogen, biomanufacturing, commercial spaceflight, new materials and innovative medicines.
“The full-throttle emphasis on achieving industrial strength shows that the leadership will continue to direct credit and other resources towards growing advanced manufacturing capacity,” said Maybank’s Tan.
“While this is driven by their desire for economic security, the move will be closely watched by countries aware of export competition from cheaper Chinese goods.”