China Signals More Policy Support With 5.5% Growth Target

While the growth goal of about 5.5% for this year is lowest in more than three decades, it’s above consensus forecasts of 5%.

China Signals More Policy Support With 5.5% Growth Target
A screen displays a live news broadcast of Chinese President Xi Jinping at the National People's Congress in Beijing, China. [Photographer: Qilai Shen/Bloomberg]

China’s government signaled more stimulus is on the cards by setting an aggressive economic growth target, calling for confidence amid rising domestic strains and global instability stemming from Russia’s invasion of Ukraine.

While the growth goal of about 5.5% for this year is the lowest in more than three decades, it’s above consensus forecasts closer to 5% and far higher than the International Monetary Fund’s projection of a 4.8% expansion. 

Premier Li Keqiang vowed at the opening of the National People’s Congress to “step up implementation” of monetary policy and stabilize house prices.

China Signals More Policy Support With 5.5% Growth Target

The slump in China’s huge property market and sporadic outbreaks of coronavirus have been a drag on the world’s second-largest economy, a key source of global demand. Growth slowed to 4% in the final quarter of 2021, before a spike in geopolitical tensions caused by Russia’s invasion of Ukraine roiled financial markets and stoked commodity prices.

Shoring up growth is of political significance to the Communist Party and President Xi Jinping, who is expected to make an unprecedented bid to stay on as leader for a third term at a key party meeting later this year. Officials have highlighted economic stability as a top priority and urged faster spending from local governments. 

“Comprehensively judging the situation at home and abroad, the risks and challenges facing the country’s development have increased significantly this year,” Li told delegates to the Congress, a meeting of the country’s Communist Party-controlled parliament. “The harder things get, the more confident we must be.”

Fiscal spending will climb 8.4% in 2022, including a more than 7% boost to China’s defense budget. The language around monetary policy suggests the central bank will cut interest rates multiple times, said Zhou Hao, senior emerging markets economist at Commerzbank AG. His base case is one 10 basis-point cut in the one-year policy rate in the second quarter, with the possibility of more.

NPC Targets20222021
GDP growtharound 5.5%over 6%
CPIaround 3%around 3%
Fiscal deficit (% of GDP)around 2.8%around 3.2%
Special local government bond quota3.65 trillion yuan3.65 trillion yuan
New urban job creationover 11 millionover 11 million
Surveyed jobless rateunder 5.5%around 5.5%

“The growth target of 5.5% is aggressive, implying that the government is willing to do more to arrest the property slump,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group. “The Ukraine crisis presents a new external risk, notably food-energy security. This cannot be addressed by interest rate or reserve requirement rate cuts. The authorities will need to launch more measures to address the supply side constraints.”

China’s monetary stimulus puts it in sharp contrast with the U.S. and other developed nations, which are hiking or preparing to hike interest rates to curb rampant inflation. Beijing kept its inflation target unchanged at around 3% for this year, although recent consumer price data has been more subdued than that. 

“Compared to previous rounds of macro-policy adjustments by developed nations, China’s capacity to respond to external shocks has increased significantly,” said Song Li, a senior official at the State Council Research Office. 

What Bloomberg Economics Says...

The message from the National People’s Congress is clear -- China’s government is determined to prevent growth slipping too much this year. The 5.5% growth target -- down from 6% in 2021 -- signals an intent to stabilize an economy facing fierce pressures from a property slump and new risks from the Russia-Ukraine war. The budget targets look conservative on the surface -- but leave substantial room for stimulus that could be even more forceful than the support it delivered in 2020 to cushion the pandemic blow. 

Chang Shu and David Qu

For the full report, click here. 

Economists said the ability of China to meet its growth target this year will largely depend on whether policy steps to stabilize the housing market are effective. Dozens of Chinese cities have made it easier for residents to obtain mortgages or lowered down payments required for housing since the beginning of the year to encourage more home sales. 

Much will also depend on whether Beijing can encourage local officials to launch more infrastructure projects. 

“China set a target that requires some effort to achieve, unlike last year, which was too low and weakened local governments’ motivation to do things,” said Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc. “The target is still within the range of China’s potential growth rate, and requires policy support and efforts by local governments.”

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“China has very large room to expand effective investment,” Liu Rihong, a senior official at the State Council Research Office, said Saturday in Beijing. “Expanding investment at the current stage does not mean China is returning to its old path of extensive development and relying on big-ticket projects to boost economic growth.”

The government plans to reduce its main measure of the fiscal deficit this year to 2.8% of GDP from last year’s target of 3.2% even as it accelerates government spending. Jacqueline Rong, deputy chief China economist at BNP Paribas SA, estimates around 3-4 trillion yuan of unspent funds from previous years will boost government income this year.

“Fiscal support for the economy will remain strong even though the budget deficit doesn’t expand,” she said.

Li reiterated Beijing’s commitment to controlling overall debt levels in the economy, and said the amount of bonds available for local governments to fund specific projects would be set at 3.65 trillion yuan, the same as last year. The government will also set up a fund to ensure financial stability and prevent systemic risks, he said, without giving details.

The central bank has already cut interest rates this year and vowed to keep policy flexible and responsive to changing economic conditions. The government hasn’t set a GDP target under 6% since 1991. No target was set in 2020, when the pandemic caused growth to slow to 2.2%. The economy expanded 8.1% last year. 

“The target of around 5.5% growth is not easy to achieve, and requires more proactive policy support,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong. “Investment, especially infrastructure investment, will be the most important and reliable driver to stabilize growth this year.”

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With assistance from Bloomberg