The Chinese government’s GDP growth target of 5% for this year is aggressive, ahead of the forecast of several analysts. To meet that target, the Chinese government will have to undertake major actions including issuing large amounts of bonds, according to several experts who spoke with FinanceAsia.
The GDP growth target of 5% was announced at the annual “Two Sessions” of the National People’s Congress (NPC), China’s parliament, and the Chinese People’s Political Consultative Conference (CPPCC), which was held in Beijing from March 4 to 11. China’s GDP growth target of 5% in 2024 is slightly lower than its GDP growth of 5.2% in 2023 and 2022.
“The GDP target cannot be attained under current economic conditions without a substantial rise in debt or a complete reform of the economy. China is facing a structural slowdown in the property sector which has long-term implications for China’s growth,” Andrew Collier, managing director of Orient Capital Research, a Hong Kong economic research firm, told FA.
This year, the Chinese government plans to issue Rmb3.9 trillion ($543 billion) of special-purpose bonds, which are largely earmarked to fund infrastructure projects, slightly higher than the 2023 target of Rmb3.8 trillion, forecast Louis Kuijs, Asia Pacific chief economist of S&P Global, and Rain Yin, an S&P analyst.
“The GDP of around 5% is higher than our estimate of 4.6% for 2024. More stimulus might be needed to meet this target, in our view,” said Kuijs.
The work report at the Two Sessions has acknowledged the issues of weak private sector confidence, poor policy communication and concerns raised by foreign businesses and investors, Kuijs noted.
Diana Choyleva, chief economist of Enodo Economics, a macroeconomic, political and geopolitical company in London, told FA, “Enodo expects the combined fiscal and monetary policy support to be expansionary, as indicated by an unusual special bonds issuance and by the accommodative tone of the central bank.”
Nevertheless, economic policy is designed to complement Chinese President Xi Jinping’s security goals, said Choyleva. “As long as Xi’s national security agenda drives economic and financial policy, we are unlikely to see a sustained growth pattern.’’
“We see the 5% growth target as ambitious and maintain our baseline growth forecast of 4.6% in 2024,” said UBS’s investment bank chief China economist Tao Wang in a UBS commentary on March 5.
Beijing committed to issue “super-long” special treasury bonds in the coming few years to support the Chinese economy, with Rmb1 trillion ($139 billion) to be issued in 2024, Wang said.
Choyleva said, “Beijing’s plan for a targeted fiscal expansion is taking shape, with announcements of a new special treasury bond that is expected to be issued continuously in coming years. This off-balance-sheet financing will allow the central government more sway over the allocation of credit in the service of President Xi Jinping’s policy priorities.”
There are more special refinancing bonds to come, to the tune of a maximum of Rmb1.5 trillion, Choyleva predicted. “This will probably be enough to deal with the most dire local government financing vehicles (LGFV) debt problems, but not with China’s overall debt overhang.’’
The Chinese government’s plan to issue more bonds in the future signals that economic support by the central government will continue in the next few years, said Tan Kim Eng, an S&P analyst.
Committing to regular future issuances of such a long-dated bond pushes the Chinese government bond yield curve further out, adding a key new instrument for domestic investors, said Tan. With interest rates currently relatively low in China, such a bond may also provide the government with long-term financing at relatively modest costs, Tan added.
Tough challenge
Nomura forecast a GDP growth of 4% for China in 2024, said a report from the Japanese bank report on March 2.
“We are concerned that China may have to struggle with another year of overall fiscal contraction, thanks to the faltering property sector and Beijing’s efforts to rein in irresponsible local government spending…. To avoid fiscal cliffs in consecutive years, Beijing may need to arrange larger special bond quotas for both the central and local governments, or direct policy banks to increase lending to local governments, perhaps with funding from the central bank,” said the Nomura report.
Last year, the Chinese economy, despite the tough property sector, benefitted from a rebound from the Covid economy. This year the return to more normal travel patterns, such as at Chinese New Year, could also benefit the country's growth.
Another Nomura report on March 5 said: “Given a much higher base . . . the still faltering property sector, the crackdown on local government debt accumulation in 12 high-risk provinces, the likely significant slowdown of investment in the new energy sector, and the lacklustre data so far available for January and February, we think the “around 5%” GDP growth target will prove very challenging."
The 12 regions in China with high financial risks are the cities of Tianjin and Chongqing, as well as the provinces of Heilongjiang, Jilin, Liaoning, Inner Mongolia, Gansu, Qinghai, Ningxia, Yunnan, Guangxi and Guizhou, according to the Nomura report of March 2. These 12 regions are required to forcefully reduce local infrastructure investment, curb local debt expansion and lower credit risks, the report added.
Nomura's report advised Beijing to "step up central government spending and encourage regions with relatively healthy balance sheets to increase spending as well." It added that Beijing "could issue even more special central government bonds, raise the quota for local government special bonds, allow local governments to issue special refinancing bonds to swap hidden debt, guide commercial banks to help roll over existing local hidden debt with lower interest rates, and direct policy banks to increase lending to low-risk local governments."
Rather than stimulating the economy more, the Two Sessions stressed building modern industries and fostering new growth drivers, emphasising technology, including the likes of electric vehicles, and education, said Wang. In addition, the Chinese government vowed to support the private sector and foreign investment by levelling the playing fields and easing entry barriers, Wang noted.
Choyleva said, “The projected benefits of these programs remain very long-term, and therefore offer little respite for investors. The hoped-for pragmatic responses to pressing issues will not appear. Investors had best adjust to this new normal and how it impacts them.’’
IPO controls
Last week the China Securities Regulatory Commission (CSRC) announced the tightening of rules around initial public offerings (IPOs) in China with a host of new regulations designed at making a more transparent market after several years of poor performance of the country’s stock markets. The emphasis is to be placed on quality listings, protecting investors, avoiding "excessive financing" and to enhance inspections of listing candidates.
Along with the deflating of the property bubble, the move shows a concerted effort by the authorities to not let bubbles once again appear on the horizon.
With additional reporting by Andrew Tjaardstra.
