China’s Ambitious Growth Target Faces Challenges as Economy Struggles
China has set an ambitious growth target of “around 5%” for this year, but achieving it may prove to be a difficult task. The country’s economy is grappling with various issues, including overcapacity, faltering price pressures, a real estate crisis, and a debt crisis. Wang Dan, chief economist at Hang Seng Bank (China), believes that reaching the 5% target will be challenging without significant infrastructure projects. She points out that last year’s growth of 5.2% was largely due to the rebound in consumption, which is not expected to happen this year.
The government’s annual work report suggests that Beijing is opting for a contractionary fiscal policy rather than an expansionary one. This means that there needs to be a large-scale project similar to the Three Gorges Dam to boost domestic demand. The Three Gorges Dam, a hydroelectric project spanning the Yangtze River, was approved in the early 1990s but only became fully operational in 2015. China has historically relied on infrastructure building as a short-term solution to stimulate growth, especially after the 2008-09 financial crisis.
To fund major projects aligned with national strategies, China plans to issue 1 trillion yuan ($138.9 billion) in “ultra-long” special treasury bonds starting this year. These bonds do not contribute to the fiscal deficit and have only been issued three times before. Goldman Sachs economists consider this pledge to be the most important positive surprise from this year’s government work report. Additionally, Premier Li Qiang announced that 3.9 trillion yuan of special-purpose bonds for local governments will be issued this year, 100 billion yuan more than last year.
China’s real estate troubles are closely linked to local government finances as they heavily rely on land sales to developers for revenue. The property market suffered a downturn in 2020 after Beijing cracked down on developers’ excessive debt reliance. This has affected consumer confidence and overall economic growth. With the housing market still in contraction, the focus now shifts to manufacturing and infrastructure development.
Infrastructure development is one of the key government work tasks outlined in this year’s report, with a focus on promoting integrated development between rural and urban areas. China’s top objective is to modernize the industrial system and develop new quality productive forces at a faster pace. Premier Li emphasized the importance of innovation, particularly in industries such as artificial intelligence, new-energy vehicles, hydrogen power, biomanufacturing, commercial spaceflight, new materials, and innovative drugs. This emphasis on industrial prowess indicates that China will continue to direct resources towards advanced manufacturing capacity, which may pose a challenge for countries concerned about export competition from cheaper Chinese products.
In conclusion, China’s ambitious growth target of 5% faces significant challenges due to the country’s struggling economy. The government’s focus on infrastructure projects and industrial innovation highlights its determination to drive long-term growth. However, achieving the target will require substantial efforts and the successful implementation of these strategies.