China People's Congress Reveals Conservative GDP Target Of Just 5% For 2023

The 2023 National People's Congress started today (March 5th; our

preview is here

). Outgoing Premier Li Keqiang delivered the Government Work Report (GWR) (

His last

), which outlined key economic targets for this year. Here are the highlights:

Over the last several months China had shown signs of a healthy rebound, with economists polled by Bloomberg raising their forecasts, seeing a 5.3% expansion this year, versus 4.8% in early January. Even top officials were reportedly surprised by the economy's resilience.

The fiscal targets (both RMB 3.8 trillion local governments special bond issuance limita and the official on-budget deficit ratio of 3%) appear slightly less conservative than expectations. The economic targets are consistent with the expectation that the broad cyclical policy position would change from the expansionary stance of 2022 to normalize this year, but it could be gradual. This will depend on the rate of consumption recovery.

Economic targets are more important than policy tone in today's GWR because this year is the year for the reshuffling of government leaders. The official targets likely reflected new leaders' expectations on the economy. The press conference to be held by new government leaders on 13 March may convey more forward-looking policy clues.

Below we drill down into the key highlights from the Two Sessions, courtesy of Goldman's Maggie Wei and Hui Shan.

1. The GDP growth target

is "around 5%" this year, lower than the "around 5.5%" target in 2022, in line with Goldman's  expectation but slightly less ambitious than the "above 5%" or "5%-5.5%" discussed by some investors. This target implies in practice that any GDP growth rate above 4.5% is probably acceptable. Considering the low base of growth (real GDP growth only at 3% yoy in 2022), the growth target this year is not challenging. For its part, Goldman continues to expect 5.5% GDP growth in 2023 on the back of a rebound in household consumption after reopening.

One reason for the somewhat unambitious growth target this years could be the fact that policymakers failed to reach the "around 5.5% growth target" in 2022.

Consistent with the statement following the Central Economic Work Conference, the GWR further added that policymakers aimed to achieve both quality and quantity improvement of the economy this year. The

CPI inflation target

This is more like a ceiling in reality, and Goldman doesn't think it would be difficult to set at "around 3 percent" for 2023.

the bank expects only a moderate increase in CPI inflation

this year after reopening.

2. The official on-budget fiscal deficit

target in 2022 will be 3.0% of GDP, higher than 2.8% in 2022. Local government special bond full year quota is Rmb 3.8 trillion, higher than 3.65 trillion in 2022. The augmented fiscal deficit indicator is a more comprehensive gauge of the broad fiscal policy stance as policymakers have other quasi-fiscal tools to support the economy. Goldman expects the

augmented fiscal deficit ratio to narrow by 1.5pp

this year, from 12.4% of GDP last year, as the pressures on policymakers to achieve the growth target this year would be smaller than last year, and growth drivers are set to shift from government-led investment last year to private consumption this year.

The government set the

new urban job creation target

to be "around 12 million", and

surveyed unemployment rate target

to be "around 5.5%", in comparison with "more than 11mn" new urban job creation and 'below 5.5%' surveyed unemployment rate in 2022. These targets are usually not binding and have been pretty easy to achieve - in 2022, despite the 3% headline GDP growth and a very weak services sector (which tended to be more labor intensive than the industrial sector), new urban job creation was 12mn and urban survey unemployment rate was 5.5% as of 2022 year-end, largely in line with government's targets.

The statement around

property policy

followed

recent policy communications

The GWR stated that policymakers would assist new urban residents and younger generations in their property purchases, and also help to rein in property-related risk. The GWR did not mention the conservative policy stance that 'housing should be used for living in, and not speculation' in its "2023 policy recommendations" section. It was only mentioned in "past achievements" of the report.

This might imply more property easing to come, though one should watch whether the new government leaders mention this conservative stance later on March 13th,

when they hold press conferences after the conclusion of the Two Sessions.

5. The monetary policy

tone

in the report is the same as the Q4 2022 PBOC monetary policy report. The GWR reiterated to maintain M2/TSF growth roughly in line with nominal GDP growth and enhance monetary policy's support to the real economy. In a recent

PBOC press conference

, when asked whether PBOC would cut interest rates or RRR further, PBOC governor Yi Gang commented

that real interest rates were at appropriate levels while lowering RRR to provide long-term liquidity "

is still an effective policy tool

",

which has left the door open for further RRR cuts when needed, but implied an interest rate cut would be less likely. Goldman forecasts

unchanged RRR and policy interest rates this year,

Given the low growth target and the possibility of strong growth rebounding after reopening,

Energy intensity

The GWR for this year did not specify a target, but it stated that energy intensity should continue to decrease. The NDRC released a separate report that stated that policymakers aimed at "..."

reduce energy intensity by 2pp this year and in practice, try to achieve better results

". The lack of a numeric target in the GWR implies policymakers might want to avoid a situation like late 2021 when production was suspended with power shortages in light of the strict energy intensity reduction target as the economy rebounded.

This year is the year of the reshuffle of government leaders. The work report this year focused more on past achievements (around 80%), compared to previous years where the premier spent around 40% of the entire report reviewing the past year and only 60% on the outlook for the next year.

Economic targets are more important than policy tone of the report as these targets were likely discussed and decided by the new party leaders after the 20th Party Congress.

Upcoming key things to watch

in the next few days include the fiscal budget report, discussions on the Party and government institutional reforms, and appointment of the new government leaders and new government leaders' press conference.