Chinese leaders have set an ambitious growth target for the year and emphasized a shift towards a technology-driven economic model. However, investors are skeptical about how Beijing will achieve these goals, especially as the government has been resistant to implementing major stimulus measures to boost income and consumption.
Premier Li Qiang announced a growth target of around 5% for 2024, acknowledging the challenges posed by the aftermath of the Covid-19 pandemic in 2022. Despite this target, the Hang Seng Index in Hong Kong experienced a significant decline of 2.6% following the announcement, reflecting investor concerns.
Economists like Sarah Tan from Moody’s believe that the measures announced by Li may not provide sufficient support to achieve the 5% growth target. Tan emphasizes the need for higher household spending to counter deflationary pressures in China. Consumer prices have been declining, with January seeing the fastest rate of decline in 15 years, and 2023 experiencing minimal price growth.
Despite the absence of widespread cash handouts or massive stimulus projects, China has managed to avoid the high inflation observed in other economies. However, stagnant wages and a downturn in property values have led to a decrease in disposable household income, highlighting the challenges faced by the Chinese economy.
Walking a tight rope
China’s growth trajectory is a matter of significant concern for global investors and policymakers, who have relied on it to propel global economic expansion. However, Beijing finds itself in a challenging position, needing to promote growth while also managing government debt levels. This balancing act has resulted in relatively modest stimulus measures.
Three years of stringent pandemic controls, which ended in early 2023, coupled with a real estate downturn, have strained local government finances, leading to substantial debt burdens. Goldman Sachs analysts noted that China is navigating a delicate fiscal tightrope between infrastructure stimulus and deleveraging local government financing vehicles.
Premier Li has set a budget deficit target of 3% for this year, consistent with last year’s initial target but lower than the revised final figure of 3.8%. Additionally, local governments have been authorized to issue special bonds worth 3.9 trillion yuan ($542 billion) for infrastructure spending, a relatively modest amount compared to market expectations.
To address local government debt risks, Beijing has directed 12 heavily indebted provinces to suspend or delay certain state-funded infrastructure projects. These provinces represent a significant portion of China’s infrastructure investment and GDP.
Despite these efforts, Nomura analysts believe that achieving the targeted GDP growth of around 5% will be exceedingly challenging. Factors such as the recent crackdown on local government debt, ongoing challenges in the property sector, and a higher base of comparison from 2023 contribute to this assessment.
Lofty tech goals
Premier Li’s recent speech outlined strategic goals for China, including plans to significantly increase the annual budget for science and technology, marking the largest boost since 2019. The focus is on accelerating the development of “new productive forces,” a term introduced by President Xi Jinping to emphasize high-tech sectors like new energy vehicles, artificial intelligence, renewable energy, and advanced manufacturing.
This emphasis underscores Xi’s commitment to promoting China’s high-tech and green industries and positioning the country at the forefront of the global race for critical technologies. Premier Li also pledged to enhance China’s manufacturing capabilities and elevate the competitiveness of “made in China” products.
However, achieving the ambitious 5% growth target will likely require more specific stimulus measures, particularly in manufacturing investments. Monetary policy, including interest rate adjustments and other tools, is expected to play a crucial role in stimulating growth.
Governor Pan Gongsheng of the People’s Bank of China (PBOC) emphasized that the central bank has ample policy tools at its disposal and hinted at the possibility of further interest rate cuts. The PBOC aims to maintain liquidity at reasonable levels, boost confidence, and stabilize prices. Last month, the PBOC made its largest reduction in the five-year loan prime rate since 2019, indicating a willingness to support economic growth.
Analysts from Jefferies anticipate that the PBOC will utilize structural tools to expand its balance sheet and support specific sectors such as technology, energy, and consumption, further emphasizing the central bank’s commitment to driving economic recovery and advancement.