China is taking a cautious approach to its economy in 2023

BEIJING — China’s leaders have struck a cautious tone about the prospects for the country’s economic recovery, after ending most Covid restrictions on business activity late last year.

Beijing on Sunday announced a goal of “around 5%” growth in gross domestic product for 2023, with only a modest increase in fiscal support.

“The government’s conservative growth target of 5% for 2023 recognizes that the recovery in China’s growth continues to face headwinds,” Martin Beach, vice president and chief credit officer at Moody’s Investors Service, said in a note. “These include the impact of slowing global growth on China’s exports and risks associated with the real estate sector and local government debt.”

“The government’s only moderate expansion of fiscal support and more targeted monetary measures suggest that longer-term issues including limiting leverage and financial stability remain important components of the long-term policy mix,” Beach said.

Premier Li Keqiang’s government work report, which was delivered on Sunday, pointed to growing uncertainty in the international environment. A separate report from the economic planning agency – the National Development and Reform Commission (NDRC) – went into bleaker detail about domestic challenges.

“There are still few factors holding back recovery and consumption growth,” the report said. “Resume growth in real estate investment is an uphill battle.”

“Some local governments are finding it difficult to recover and are facing significant fiscal imbalances,” the report said. “Debt risks from local government financing platforms must be addressed immediately.”

Li Chunlin, deputy director of the National Commission for the Defense of Human Rights, told reporters on Monday that consumption could become the main driver of economic growth this year.

He added that the authority has many tools to boost consumer spending.

Gross domestic product grew just 3% last year, well below the official target, as Covid controls and a real estate slump cut growth. Retail sales fell 0.2% in 2022.

The impact of the epidemic has weakened, said Zhong Liang, a senior researcher at the Bank of China, and the recovery in retail sales alone can drive growth.

Overall, while some increase in fiscal support is needed, it is important not to “blindly” expand such support, he said, noting that this leaves room for future policy moves. This is according to CNBC’s translation of his notes in Mandarin.

Retail sales rebounded 12.5% ​​in 2021 after declining in 2020. GDP jumped 8.1% in 2021.

This year, the pressure on the economy has decreased significantly, and the economy can grow from a low base, said Xu Hongcai, deputy director of the Economic Policy Committee of the China Association of Political Science. “The key is to improve the quality of growth.”

He said that an overall recovery in the economy could help the growth of fiscal revenues, and boost the demand for workers. However, he noted that “the biggest pressure this year will be on foreign trade.”

Many economists expect that China’s exports will, at best, barely grow this year. This is due to the decline in demand for Chinese goods as a result of the slowdown in the economies of the United States and Europe.

China announced on Sunday that its deficit-to-GDP ratio is expected to rise to 3% from 2.8% last year. The country also increased the annual quota of special-purpose bonds by 150 billion yuan, to 3.8 trillion yuan, or about $551.12 billion.

The measures aren’t as drastic as they act as a “financial buffer,” said Susan Zhu, senior director at S&P Global Ratings.

Because China has not fully returned to a consumption-driven policy [economy]”There are a lot of external challenges,” she said, “the real estate slowdown.”

The economic targets announced on Sunday follow guidance set in December at a high-level meeting called the Central Economic Work Conference.

While the policy direction is very clear, more confidence-boosting signals are needed, said Wang Jun, director of the Forum for China’s chief economist. He said such details may come in the next few days during China’s annual parliamentary meeting.

This year’s meeting is scheduled to formalize the new prime minister and other government leaders, as well as issue a “reform plan” for the ruling Chinese Communist Party and state institutions.