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China reaction: 5% GDP growth target does not erase concerns over deflation

  • 05 March 2024 (3 min read)
Premier Li Qiang set China’s annual growth target for the year at “around 5%” for 2024, as he opened the annual National People’s Congress earlier today.
The fiscal deficit was set at 3% of GDP for this year, the same level as initially targeted in 2023. In addition, RMB 1tn central government special bonds and RMB 3.9tn local government special bond were announced.
The proposed fiscal package was not a surprise. That said, it did not ease market concerns on deflation.
Monetary policy is likely to stay easy and coordinate with the fiscal measures. Further rate cuts are expected in the coming months, especially in H2 after easing cycles are expected to have begun in other major economies.

Premier Li’s first Government Work Report delivered no surprises

The annual meeting of National People’s Congress (NPC) was opened by the Government Work Report from Premier Li Qiang, marking his debut at the NPC as Premier. In the report, the GDP growth target for 2024 was set at “around 5%” – the same as last year – with the fiscal deficit aimed at 3% of GDP (equivalent to RMB 4.06 trillion). Additionally, a series of additional long-dated (>10 year) central government special bonds (CGSB) will be issued over the following years, starting with RMB 1 trillion for 2024. The quota for local government special bonds (LGSB) is set at RMB 3.9 trillion for 2024, which is RMB 0.1 trillion more than in 2023. However, no details were announced regarding the local government debt swap/refinancing plans.

Although the “around 5%” GDP growth target aligns with the target for 2023, it can be seen as more ambitious given the less favourable base effect from last year – growth in 2022 had been depressed by COVID and China’s policy actions based on its Zero-COVID ambition. Preliminary estimates suggest that the fiscal package may be sufficient to achieve the growth target for this year. Combined with the leftover fiscal quota from H2 2023 (RMB 500 billion CGSBs were left unissued last year, but roughly RMB 750 – 800 billion will be realised this year); approximately RMB 1 trillion of pledged supplementary lending (PSL); and the newly announced RMB 1 trillion CGSB, the fiscal package is worth around 2 percentage points (2ppt) of GDP. Assuming fiscal spending has a multiplier close to 1, with most going into infrastructure investment with limited spill-over effects, GDP growth this year, this should translate to a boost to growth of around 2ppt.

Supply centric stimulus package may not be as reflationary

China also reset its Consumer Price Index (CPI) inflation target at “around 3%”. However, unlike China’s unerring ability to achieve its GDP target, it does not have a similar success in achieving its inflation target. The PBoC’s inflation target has remained at 3% since 2015 (with an exception of 3.5% in 2020) while actual inflation over briefly reached (and exceeded) this rate in 2019/2020. Indeed, the target serves more as an inflation ceiling than a goal. As such, this year’s target, significantly higher than January’s annual inflation rate of -0.8%, does not imply significant support is underway for consumer prices.

The market had been calling for more support for the consumer sector ahead of the NPC, as concerns over deflationary pressure mount. However, the supply-centric fiscal stimulus plan may have disappointed, especially the offshore market. The Hang Seng index dropped by more than 2.6% on the day.

Monetary policy stance remains loose

Growth targets for total social financing and M2 supply were also set to be consistent with expected economic growth and price levels, with an emphasis on credit prudence, flexibility, efficiency, and accurate targeting. The recent policy moves, including a 50 basis points (bps) required reserve ratio (RRR) cut and a 25bps cut to the 5-year Loan Prime Rate (LPR), confirm the PBoC’s easier policy stance. We expect monetary policy to remain loose to coordinate with the fiscal stimulus for this year. Further RRR and policy rate cuts are likely, especially after the US begins its easing cycle, providing more room for the PBoC to move, while it keeps one eye on the level of the yuan.

The cancellation of the Premier’s press conference to close the NPC – a tradition of the last 30 years – has left the market additionally disappointed, adding another layer to the already vague policy delivery. Meanwhile, it makes tomorrow’s press conference (6 March, 3pm Beijing time) more of a focus. The Head of the PBoC, along with leaders from the Ministry of Finance, Ministry of Commerce, National Development and Reform Commission, and Securities Regulatory Commission, are expected to provide further insight into the economic planning for the year.

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