Why is China targeting lower growth in 2023?

Asia’s largest economy targets a growth of 5 percent for 2023, the lowest in decades.

The world expected China to aim for higher growth this year after it lifted stringent zero Covid-19 restrictions in December and announced victory over the pandemic. Still, when the National People’s Congress meeting started over the weekend, pundits and markets were in for a surprise.

Asia’s largest economy has set a growth target of around 5 percent for 2023, underwhelming expectations of 5.5 to 6 percent. This target is the lowest in decades.

The modest growth prediction is also surprising given that it is on a low base.

In 2022, China had set the growth target at around 5.5 percent and the economy grew 3 percent, meaningfully missing the target for the first time in decades.

Amid slowing global growth and a lingering risk of recession in the West, investors were hoping that a China bounceback would provide a much-needed respite. Now, this confidence has been called into question.

Is the expected China recovery a chimera? What are the reasons for the low target?

Cautious policymaking

China’s so-called Government Work Report sets economic growth and job creation as the top priorities but there is no visible step-up in either fiscal or monetary easing, according to Wei Yao, head of research for APAC at Societe Generale.

Expectations of slowing exports, high government debt levels and a property sector that is not completely out of the woods may have prompted restraint.

“Choosing to aim low may be an indication of cautiousness among policymakers, even though they might have indeed become more confident about this year’s growth following the strong data in the past weeks,” the economist said.

“After all, since 2019 the Chinese economy has not been able to routinely beat the official growth targets like before. Besides, while the target is revealed by the outgoing Premier Li Keqiang, the task of achieving the target will fall on a new government team, which probably wants to make very sure it hits the mark (and some) during its first year,” she added.

Others agree.

The economic plans unveiled at the National People’s Congress point to slower growth but since they come off the back of better-than-expected data since zero-Covid was abandoned, the Chinese economy could still grow 5.5 percent in 2023, according to research firm Capital Economics.

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Still, the conservative targets mean that the bar for rolling out additional monetary and fiscal support will be higher, with officials giving themselves more room to tackle structural issues and financial risks, it added.

Potential China exodus could be a slow-burning drag

Beyond this year, China’s economy faces headwinds from the potential exodus of companies seeking to move away to friendlier countries and south Asian peers like Vietnam and India.

The US-China trade war, aggressive political moves in Hong Kong and China’s geopolitical manoeuvering on the Russia-Ukraine war, have made businesses question the extent of their presence in the Asian giant.

China is no longer the primary investment destination it once was, according to a recently released survey by the American Chamber of Commerce in the People’s Republic of China.

Nearly half of AmCham China member companies noted that China's investment environment is deteriorating and a similar number are pessimistic about the future of US-China relations in the coming year.

Although a majority of members are not yet considering relocating their supply chain outside China, there is a 10-percentage-point increase in the number of companies considering or already starting to relocate their manufacturing and sourcing outside of China.

This process of companies shifting out of China will be a slow burning drag on China’s potential growth rate over many years, Julian Evan-Pitchard, Head of China Economics at Capital Economics, said in response to a question by Moneycontrol.

“I definitely think it is a concern for China’s policymakers,” Evan-Pitchard said. “If you look in the NPC reports, there is quite a lot in there about doing more to attract foreign investors and FDI into China, and making sure the environment remains attractive for foreign companies, as part of its efforts to retain a large manufacturing sector, a large competitive export sector.”