China: modest economic targets and prudent policy support
At the annual National People’s Congress that stared on 5 March, the Chinese government outlined its growth and inflation targets together with policy priorities for 2023. In the event, the GDP growth target was set at “around 5.0%” for 2023, which is in line with our own forecast but is lower than last year’s target of 5.5%. The target for headline inflation has been kept unchanged from last year at “around 3.0%”. The fairly mild price momentum in China may allow room for pro-growth policy support.
However, policy support will likely be tightly targeted and prudent. There is low probability of blanket monetary easing such as cuts in policy rates or banks’ required reserve ratios in the coming months. But there may be scope to deploy more structural tools such as targeted credit facilities. As in the previous two years, the government expects credit growth to stay “in line with GDP growth”. Given the rebound in economic activity following China’s re-opening, we expect a 10.5% increase in credit growth this year, up from 9.6% in 2022.
On the fiscal front, the headline budget deficit is projected to be 3.0% of GDP in 2023, slightly above the 2022 level of 2.8%. If we include other government funds and transfers, the effective fiscal deficit target is 4.5% of GDP, down from 4.7% in the 2022. Local government special bond (LGSB) issuance is set to be Rmb3.8 trn (USD550 bn) in 2023, below actual issuance of Rmb4.04 trn last year. Hence, there is to be no net new fiscal stimulus from the government in 2023, in line with our expectations.
The government work report makes it clear that supporting the recovery of domestic consumption will be a key focus this year. We expect more measures to include continued support for rural households and for large-ticket items like automobiles. But large-scale cash handouts to households in general are unlikely.
The government has raised its target for job creation to 12 million in 2023 (vs. 11 million in 2022) and set a more flexible target to reach an unemployment rate of “around 5.5%” (vs. “below 5.5%” in 2022). In January, the official unemployment rate was 5.5%, but a high 17.3% for young people. In our view, the higher target for job creation together with the more flexible unemployment target rate show that the authorities are fully aware of the mounting pressures in the labour market.