[China Two Sessions] "They said it was the first year of economic recovery"... Why set a '5% growth' target?

Bloomberg Estimated Figures Fall Below Regional Averages
Export Slump, Debt Issues Amid US-China Tensions and Real Estate Risks
3rd Leadership Faces Burden of 'Failure' Label

China has set this year's economic growth target at a conservative level of around 5%, lower than market expectations, marking what it calls the "first year of economic recovery." This reflects not only the challenging conditions for a strong rebound in the Chinese economy but also a political calculation to avoid the label of "failure" in the first year of President Xi Jinping's third term in office.

Li Keqiang, Premier of the State Council of China, presented the GDP growth target of "around 5.0%" for this year during the opening session of the National People's Congress (NPC) on the 5th. The "around 5.0%" target is the lowest since the government began announcing growth targets (based on GDP growth) in 1994, excluding 2020 when the target was omitted due to the impact of the COVID-19 pandemic. It is also below the Bloomberg consensus median estimate (5.3%) and the weighted average of previously announced regional growth targets (5.6%).

Export Slump, Debt Burden... US-China Conflict and Real Estate Risks Also

This figure appears to reflect the difficult domestic and international conditions that make it hard for China to achieve a strong economic growth rebound. For China, this year is both the first year of growth and the first year of normalization. In particular, it must manage the deteriorated fiscal situation caused by efforts over the past three years to contain and manage COVID-19 spread and provide medical services. The fiscal deficit-to-GDP ratio, which was raised to 3.6% in the first year of the pandemic, has been lowered to 2.8% this year after 3.2% last year, indicating a commitment to active fiscal management. Last year, China's fiscal deficit was 8.96 trillion yuan (1,682.6 trillion won), and the government debt ratio reached 50.4% by year-end.

The export slump, a key pillar of the economy, also weighs heavily on China. In December last year, export value dropped 9.9% compared to the previous year, the largest decline since March 2020 (-17.20%). This is largely due to the global economic downturn and increasingly stringent US sanctions amid the US-China technological hegemony competition. The US administration is focused on competition by blocking American capital investment in China's advanced sectors such as semiconductors, quantum computing, and artificial intelligence (AI). Political and diplomatic tensions with the US, which have expanded to issues like Taiwan and surveillance balloons, also pose a significant burden.

Alongside exports, the risk of instability in the real estate market, which has supported the Chinese economy, is also a concern. The NPC work report did not express any intention to boost the real estate sector, which has been a pillar of the economy alongside exports. Instead, it stated that "efforts must be made to prevent disorderly expansion of the real estate market to promote stable development" and that "risks in real estate companies will be effectively prevented and mitigated, and asset and debt situations improved." This indicates a focus on risk management to prevent insolvency rather than aggressive deregulation to stimulate the economy.

[Image source=Yonhap News]

Third-Term Leadership: "No Failure"... Political Calculations at Play

The poor performance last year, with actual growth (3.0%) falling well short of the target (5.5%), seems to have influenced the conservative outlook. The responsibility for setting and achieving this year's target lies with the top leadership of the third term, including President Xi Jinping. As their first year of governance begins, the conservative target is seen as an effort to avoid the label of "failure" in the year-end evaluation.

Concerns about a resurgence of COVID-19 among the leadership are also evident. After China abandoned its zero-COVID policy, social disruption was significant in November-December last year, when a sharp rise in COVID-19 cases caused various improving economic indicators to plunge again. The manufacturing Purchasing Managers' Index (PMI), reflecting the real economy, fell to 48.0 in November last year, the lowest since the Shanghai lockdown in April 2022 (47.4). Despite the full transition to a "with-COVID" approach, this year's Two Sessions were conducted under a closed-loop system, indicating leadership concerns about a resurgence of the virus. NPC delegates underwent PCR testing before entering the closed loop and were not allowed to leave the hotel or venue during the event. Domestic and foreign journalists permitted to attend also stayed in quarantine hotels from the day before the opening and closing ceremonies or press conferences, following the closed-loop protocol.

This content was produced with the assistance of AI translation services.