(Bloomberg) -- China will likely announce its lowest economic growth target in more than three decades when top leaders gather Saturday for a key political meeting, putting pressure on the government to step up fiscal stimulus to spur demand and jobs.
The annual National People's Congress will kick off with a speech by Premier Li Keqiang outlining the main economic goals for the year, including for growth, the budget and spending, inflation, monetary policy, and jobs. The strength of the economy has political significance for President Xi Jinping, who is expected to seek an unprecedented third term as leader when the Communist Party's Congress takes place this fall.
Read More: Xi Jinping Engulfed in Crises Just When He Wanted Stability Most
China's economy started losing steam late last year, weighed down by a housing market slump, repeated Covid-19 outbreaks and weak consumption. Policy makers also had to grapple with surging commodity prices and more recently, geopolitical tensions around Russia's invasion of Ukraine, which have roiled financial markets. Beijing's attempts to stabilize growth with more stimulus appear to have had little effect so far, with investors watching closely for more policy action from the government and central bank.
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Here are some of the key issues to watch in the government's work report and budget documents, scheduled for release at 9 a.m. in Beijing on Saturday:
Slower Growth Target
The centerpiece of the event is the release of the annual growth target, which is the anchor for the government's whole system of policy making, including the budget. Most economists in a Bloomberg survey see China adopting a growth target of between 5% and 5.5% this year, which would be the first time since 1991 that the goal is below 6%.
What Bloomberg's Economists Say...
“Spurring growth will be top of the agenda – quite a contrast from the scene a year ago when policy makers were betting that a stronger recovery from the pandemic would allow for a stimulus exit.”
-- Chang Shu, David Qu and Eric Zhu
See here for full note
There was no target set during the pandemic year in 2020, when growth slowed to 2.2%.
The consensus forecast is for the world's second-largest economy to expand by 5.1% this year, while the International Monetary Fund forecasts a 4.8% increase.
A target that's too high would require more aggressive stimulus from the government but may also add to the nation's debt burden by funneling investment into unproductive areas. A growth rate that's too conservative may not provide sufficient jobs.
“5% is likely to be the bottom line,” Larry Hu, head of China economics at Macquarie Group Ltd., wrote in a note. Even though the target would be the lowest in the modern era, it's still “not an easy one” to meet, he said, given the economy only expanded by 4% in the fourth quarter and the growth rate in the first half of this year would most likely be below 5%.
More Monetary Easing
Investors are watching out for any change in language around monetary stimulus, although a shift in the stance from “prudent monetary policy will be flexible and appropriate” isn't likely. The People's Bank of China pledged earlier this week to make monetary policy responsive to changing economic conditions, suggesting more easing could be on the cards, including further cuts in interest rates and the reserve requirement ratios for banks.
“Moderate re-leveraging is underway following a dovish turn by the People's Bank of China,” Standard Chartered Plc. economists including Ding Shuang wrote in a report. The central bank may cut the amount of cash banks have to keep in reserve by 50 basis points in March and lower the interest rate on medium-term policy loans by 10 basis points in April, they project.
While ensuring the pace of total credit expansion, the government may also emphasize adjusting the structure of monetary policy to be more supportive of the real economy, especially struggling small businesses and key national initiatives such as cutting carbon emissions.
Stronger Fiscal Thrust
Although on the surface it's likely that the fiscal policy stance remains largely unchanged from last year, stimulus will likely be stepped up to drive infrastructure investment and bolster growth this year.
Premier Li is likely to repeat the current stance that “proactive fiscal policy should be more efficient, targeted and sustainable” and economists expect the official budget deficit as a ratio of gross domestic product to be broadly similar to 2021. However, the government's tight rein on spending last year means it has leftover money that can be spent quickly.
The main budget gap is expected to be more or less unchanged. However a broader measure of the deficit may widen to 7.4% from 7.0% a year ago, Nomura Holdings Inc. economists led by Lu Ting wrote in a report. That's likely due to a moderate increase in the quota for local governments' net financing, they said.
“Infrastructure seems to be the only sector that policy makers can boost,” the economists wrote, but this “would only fill a small part of the gap left by slowing export growth, the large property sector contraction and the rising costs of China's zero-Covid strategy.”
The government will also announce bigger tax and fee cuts, Finance Minister Liu Kun said recently. Citigroup Inc. economists including Xiaowen Jin estimated the reductions could be worth 2 trillion yuan ($317 billion) this year, compared with 1.1 trillion yuan in 2021.
Property Soft-Landing
The downturn in the crucial property market has been deeper and more enduring than many had expected, causing developers to default, housing prices to slump and home buyers to hold back on purchases. Beijing is already pushing banks to lower interest rates and cut down payments for home buyers to boost sales, but the question is how far it can go to support the sector without causing a rebound in speculative demand.
There's no sign of a change in the principle that “houses are for living in, not for speculation,” although Beijing is expected to order the construction of more affordable rental homes to help satisfy housing demand.
Any signals on the proposed expansion of the trial of a property tax will be key, given the weight of the sector to China's economy. The parliament authorized the limited property tax in Shanghai and Chongqing be expanded to more cities last October, but the plan was put on hold following the slump in sales and fall in prices.
“We assign a low probability to a property tax being mentioned in the Premier's address,” Nomura's economists said. “And even if one is mentioned, it could be downplayed by delaying the actual implementation.”
Job Support
A stable labor market is the bottom line for Chinese policy makers, with various levels of government reiterating that it's crucial to ensure key groups including graduates and migrant workers can find jobs.
A steady supply of new jobs is important for both social stability and government legitimacy and with only meager unemployment benefits, getting people into work is also key for supporting domestic spending. While the official numbers show the labor market is stable, alternative indicators and anecdotal reports suggest a bigger unemployment problem.
©2022 Bloomberg L.P.
With assistance from Bloomberg
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