China's economy resilient with potential and vitality

SHI YUMENG/FOR CHINA DAILY

Nation reaffirms pro-growth stance

The annual session of the National People's Congress, which started on Sunday, has reaffirmed Chinese policymakers' pro-growth stance set at the Central Economic Work Conference in December. In light of China's disappointing economic performance due to the strict COVID-19 restrictions, the CEWC had called for an "overall improvement" of the economy, starting with making efforts to improve expectations and boost confidence. In this context, we (at Standard Chartered Bank) had expected the government to set reasonable as well as ambitious economic targets to stabilize market expectations.

This year, the growth target is around 5 percent. Last year, China's GDP grew by only 3 percent, undershooting the target of 5.5 percent by a big margin. That's why local governments have adopted more ambitious growth targets for 2023, ranging from 4.0-9.5 percent and averaging 6 percent.

The inflation target is around 3 percent (annual average). Consumer price index inflation averaged 2.0 percent in 2022, and we forecast a moderate rise to 2.3 percent this year, much below the target even after assuming a significant increase in service prices on reopening.

The unemployment rate target is maintained at 5.5 percent. In addition, the government has pledged to create 12 million new jobs during the year. And if the recovery remains on track, these targets should be within reach, although lowering the youth unemployment rate (16.7 percent in December 2022) will be more challenging, in our view, given an increase in college graduates to about 11.5 million this year.

In 2022, the government had to under-implement spending to meet the broad budget deficit target of 7.4 percent of GDP, because of revenue shortfalls. The combined total revenue from the general public budget and government funds budget dropped 6.3 percent (relative to a budgeted increase of 8.2 percent) because of a 23 percent plunge in land sales revenue, tax refunds and a slower economy.

Spending increased by only 3.1 percent compared with the budgeted expansion of 15.6 percent, and the government appears to have deployed all available resources, according to our estimate, including general bond proceeds of 3.37 trillion yuan ($490.59 billion) and local special bond proceeds of 4.15 trillion yuan.

This year the official budget deficit (covering only general public budget) is widened to 3 percent of GDP from 2.8 percent last year, but the broad deficit (also covering government funds budget) is likely to be scaled back. In December, the CEWC called on the government to "maintain necessary spending intensity while making the fiscal position sustainable and local government debt controllable". The 2023 budget points to the government intention to provide adequate support to boost growth while maintaining fiscal sustainability.

Under the general public budget, the focus of fiscal support this year appears to have shifted to expanding spending, versus tax cuts in 2022. In addition, the central government may ramp up transfers to local governments to increase their spending capacity without adding to their debt burden.

Under the government funds budget, the local special bond issuance quota is set at 3.8 trillion yuan (slightly below 3 percent of GDP), higher than the original 2022 quota of 3.65 trillion yuan but lower than the augmented quota of 4.15 trillion yuan.

While the broad deficit is likely to be smaller than in 2022, we think fiscal policy will become more effective in supporting economic activity, and the expected revenue recovery would allow total spending to grow faster in 2023.

Besides, quasi-fiscal operations by policy banks may be increased, if necessary, to finance key projects.

The government is likely to tackle the problem of local hidden debt (including that of local government financing vehicles, LGFVs) by asset disposal and/or the issuance of refinancing bonds, with restructuring also likely.

The monetary policy tone is consistent with the CEWC's message, aimed at "keeping money and credit growth in line with nominal GDP". We expect monetary policy to remain accommodative in the first half of this year, with reserve requirement ratio (RRR) cut likely in the second quarter of the year.

However, policy may turn neutral in the second half of this year when the recovery gains traction. The People's Bank of China may guide total social financing growth to slightly below 10 percent to stabilize the total debt-to-GDP ratio.

The Government Work Report reiterated support for meeting the basic housing demand, and upgrading demand, as well as improving the balance-sheet position of high-quality large housing developers. Moreover, we expect the government to continue to prioritize job creation, including by normalizing the regulation of internet platforms, encouraging the expansion of private business, and attracting and retaining foreign direct investment.