Macroscope | How can China hit its GDP target when it needs to grow just to stand still?

Does anyone really believe that China will hit its growth target for this year of “around 5 per cent”? Even Premier Li Qiang, who announced the ambitious goal on Tuesday at the opening session of the annual National People’s Congress, is sceptical, acknowledging that it will not be easy for Beijing to deliver on its pledge.

This is an understatement. For starters, last year’s economic performance was flattered by a low base effect stemming from citywide lockdowns during the Covid-19 pandemic. Moreover, the tailwinds in the first half of 2023 caused by the sudden reopening of China’s economy dissipated some time ago.

More worryingly, the government’s 3 per cent inflation target flies in the face of an economy experiencing its worst bout of deflation since the 2008 global financial crisis. In annualised terms, consumer prices have contracted for four straight months while producer prices have been in negative territory since October 2022. Societe Generale says the 3 per cent target is “disconnected from reality”.

Whether it likes it or not, China is in a Red Queen’s race whereby its economy needs to generate more growth just to stand still. While Li said China required “policy support and joint efforts from all fronts”, the measures announced fall woefully short of what is needed to revive growth and restore confidence in China’s economy.

The policy response remains piecemeal and restrained. It is also equivocal and confusing, a source of huge frustration for investors. Even though conditions in China’s manufacturing and services sectors have deteriorated since the economy reopened and market sentiment has worsened dramatically, the government refuses to open the fiscal spigots.

The augmented fiscal deficit – an estimate of all the budgetary resources used to support growth – for this year is expected to be just a bit higher than last year’s level. While Morgan Stanley reckons fiscal policy will become more expansionary later this year as growth disappoints, it believes the additional stimulus measures will be offset by the “continued tightening effects” of deleveraging in the property sector and across local governments.