China’s lowest growth target in decades signals a new era of caution

China’s political leaders this weekend issued a bleak growth forecast for the world’s second-biggest economy, despite optimism after three years of lockdown during the coronavirus pandemic.

Policymakers at China’s annual parliament session in Beijing set a growth target of just 5 percent for 2023, the lowest in decades and falling short of last year’s Covid-era figure of 5.5 percent, which it failed to achieve.

“The reason for choosing a low target is to make sure they can achieve it,” said Carlos Casanova, senior economist for Asia at investment bank UBP, who described the 5 percent figure as a “floor,” which was slightly exceeded at times should be based on comparisons with the previous year’s weakness.

China’s economy grew just 3 percent in 2022 after the government imposed strict lockdowns in major cities to contain the virus.

Even if the 2023 number is surpassed, the government’s caution points to a vastly changed economic environment as China emerges from the shadow of the pandemic.

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With a deepening housing crisis, falling exports amid rising global interest rates and the hangover of zero Covid restrictions, policymakers are less concerned about one lofty target – a number closely watched after two decades of consistent outperformance – than the threat of another disappointing reading.

Xiangrong Yu, chief economist for Greater China at Citi, indicated that Beijing is concerned about “damaged mood in the event of another failure.” The bank forecasts growth of 5.7 percent for this year.

While recent high-frequency data shows a rapid recovery in activity, other indicators point to deeper systemic challenges. Home sales are down year-on-year, albeit less sharply than late last year, and many developers remain under pressure to restructure liabilities. Exports have declined in each of the last three months of 2022, the latest available data shows.

“The government has taken a very cautious approach in the face of a number of uncertainties,” Tang Yao, associate professor of applied economics at Peking University, said of the growth target.

He pointed out that “uncertainty in the international environment” topped the list of concerns raised by former Premier Li Keqiang, China’s second-biggest official.

Li is set to be replaced by Li Qiang, a close ally of President Xi Jinping, in a government reshuffle this week.

China weathered the early stages of the pandemic better than many of its peers as strong demand for its exports supported the economy despite weaker consumption. In 2021, the country’s GDP grew 8.1 percent, although that figure was supported by a comparison with early 2020 when activity slumped.

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A significant part of this growth was also supported by net exports, which are now weakening as other major economies struggle to contain inflation. Tang said while domestic consumption will recover this year, China could be hit by a “severe” drop in foreign demand.

Dan Wang, chief China economist at Hang Seng Bank China, said the low target is “mainly a reflection of declining exports,” given their share of growth in recent years. However, she also pointed to a “conservative” monetary policy and suggested that the development of the housing market could be crucial to reach the 5 percent growth target.

“In the past, when China’s economy was in a recession, credit growth typically picked up, and that can boost the real estate cycle,” she said.

“This year, even last year, there was no such intent to inflate the housing bubble.”

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The prospect of stimulus in China – policymakers’ favorite response to past bouts of weakness, particularly after the 2008 global financial crisis – stands in uneasy proportion to a policy push to curb high levels of debt.

Home sales in China have slumped since mid-2021 after a spate of defaults by the country’s biggest developers, notably Evergrande, although the pace of the decline slowed in January and February.

Beijing has been reluctant to allow local governments, which rely on land sales for much of their income, to borrow more and has not raised limits on how much they can raise by selling new bonds this year.

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The weakness in trade could also affect private sector credit demand. “Financing is often in place, but private manufacturing companies are reluctant to borrow to expand production due to the sharp decline in exports,” Tang said.

Nonetheless, in January, a month when lending often jumps around the lunar new year, the loan data showed the highest monthly bank lending on record. Analysts attributed the increase to a rise in corporate loans.

Focus on the growth target — and its relevance for predicting Beijing’s policy direction — may also wane in favor of other metrics as Xi prepares for a major overhaul of his administration that is expected to give him more control over policy direction.

The government has also set a target of 3 percent for inflation and 5.5 percent for unemployment, which Casanova called “aggressive”.

“The precedent of not missing the growth forecast is already broken,” he said. “Xi has been trying for the longest time to get rid of GDP targets as his overarching measure of performance.”