China’s GDP growth target is reasonable, but ‘revenge spending’ won’t do the job alone

China’s latest “two sessions” meetings of the National People’s Congress and the Chinese People’s Political Consultative Conference have attracted considerable attention internationally. They mark the start of President Xi Jinping’s third five-year term, one in which he is unveiling a new team of top government officials. Investors are closely watching this new team’s approach to managing the economy, which will set the tone for government policies in the next five years. This is particularly important to them since the Chinese economy has experienced some rough patches in the past two years. Regulatory reform in 2021 shook the technology and education sectors. The real estate market experienced a correction as buyers’ confidence weakened. The “dynamic zero” Covid-19 policy brought stringent lockdown to many cities, leading to a sharp drop in consumption and a rise in unemployment. The government’s economic objectives are often distilled by investors into several numerical targets or projections. These include a 2023 GDP growth target around 5 per cent, inflation around 3 per cent, money supply growth in line with nominal GDP growth and an employment target of 12 million new jobs. Economists can then gauge how the government and central bank will operate their fiscal and monetary policy to achieve these targets. The GDP growth figure has received most of the attention among those targets. Given last year’s economic downturn and domestic consumption only just starting to recover, there were hopes the government would set a more aggressive target to signal its intention to bounce back stronger. As such, the target of around 5 per cent was too conservative in some investors’ eyes. However, taking into account both structural and cyclical factors, the government’s growth target is realistic and achievable rather than being conservative. Although investors have recently focused on the rebound in consumption following the removal of pandemic control measures, there are still several headwinds facing the Chinese economy in 2023. Exports are seeing the biggest turnaround, flipping from being a key contributor to the economy during the pandemic to possibly being a drag this year. Much like those of the rest of Asia, China’s exports started to slow late last year amid falling demand from the United States and Europe. Export growth saw a 0.3 per cent fall year on year in October 2022, slowing further to a 6.8 per cent year-on-year fall in the first two months of 2023. Consumption is rebounding strongly. While we wait for official data on January-February consumer spending, high-frequency proxies such as domestic travel, cinema box office and other traffic data show consumption is back on track. However, this type of “revenge spending” is not enough to put the economy back on a sustained growth path. The economy will also need a rebound in corporate confidence to draw investment again. China’s policy on nurturing new industries such as semiconductors and other technological hardware to reduce dependence on imports, renewable energy and electric vehicles could be a growth area in the medium term. ‘Two sessions’ proposals call for China’s own CHIPS Act and supply chain heads The real estate market plays an important role in the economy, and last year’s downturn created considerable financial pressure for developers and dampened buyer sentiment. The authorities, especially local governments, have since relaxed several restrictions in trying to improve market momentum. Property transactions are starting to stabilise after a year of decline. Whether this market can make a full recovery depends on the government’s attitude on the role of residential property as an investment asset. If investors don’t anticipate an appropriate return from investing in real estate, it might take longer for the sector to recover. In addition to these cyclical factors, it is worth considering some of the long-term structural factors driving the Chinese economy. The International Monetary Fund’s World Economic Outlook forecasts China’s economic growth to average around 4.6 per cent between 2023 and 2027. J.P. Morgan’s Long-Term Capital Market Assumptions estimates that China’s economic growth should average around 4 per cent during the next 10 to 15 years. A large part of this deceleration is because of demographics and a slowdown in labour supply growth. Moreover, as the economy gradually matures, its productivity growth will slow down unless there are new sectors that emerge to help make workers more productive. This is where investment in technology and new industries can play a vital role. In a year with growth in the US and Europe decelerating or possibly going into recession, a 5 per cent growth target for China is respectable. This will require Beijing to maintain a loose monetary policy and enhance its support for the private sector. Global investors will be watching the new leadership team closely to gauge whether the Chinese economy is on a steady growth path. Tai Hui is chief market strategist for the Asia-Pacific at J.P. Morgan Asset Management