By LIU Lin

 

The Chinese government’s work report is delivered every year during the National People's Congress. The government work report for 2023 was released on March 5, by premier LI Keqiang, to the delegates of the National People’s Congress for review and approval.

The work report offers an all-inclusive assessment of economic and social development during the previous year and lays out broad guidelines for policies than can be expected to emerge over the next twelve months. It is meticulously parsed by investors.

Here are the key takeaways.

GDP growth

Growth target 5 percent, 12 million new jobs to be created

Expectations had been for a slightly higher target of 5.5 percent goal. The downward adjustment is the probable result of the unexpected population decline in 2021. The country’s population fell in 2022 for the first time in six decades, a turnaround that could mark the beginning of a long period of contraction with deep consequences for the Chinese, and world, economy. The drop – a very small one of roughly 850,000 people for a population of 1.4 billion - was the first since 1961.

The target also reflects a shift in priorities. The report says growth should focus on “material improvement in quality and reasonable increase in quantity.”

If the target is to be met, the country will need to create 12 million new jobs for those graduating from college in 2023. That will be no mean feat for LI Qiang, the former Communist Party secretary of Shanghai, who took office as China’s new premier on Saturday. The number of fresh graduates will be 7 percent higher, (820,000 more) than last year. At the same time, an extra 2 million people will be retiring. The working-age population has been declining since 2015, which alleviates some pressure on employment. 

The economy has gradually returned to life since all Covid restrictions were lifted last December. PMIs (Purchasing Managers' Indices) across various boards have been consistently above 50 percent so far this year, indicating a general expansion in manufacturing. The government is also predicting a strong recovery in the service industry. The service economy accounts for 48 percent of all jobs in the economy.

Monetary policy

Targeted and forceful policies to be ‘moderate’

There are no great surprises as the report sets out for a prudent monetary policy, one that will be targeted and forceful. As usual, the report commits to supporting growth in the real economy. There is no mention anywhere in the report of interest rates.

YI Gang, governor of the People's Bank of China (PBC), has said that he believes interest rates are already low and the next step should be to reinforce what has already been achieved by lowering rates. Yi has stated that he is open to boosting long-term liquidity by lowering the reserve requirement.

Cutting the reserve requirement will allow financial institutions to provide more support to enterprises, stabilize the stock and bond markets, and boost market confidence. In January, Chinese banks made 4.9 trillion yuan in new loans, breaking last January’s record of 4 trillion.

Deputy PBC governor LIU Guoqiang has set out the central bank’s intention to frequently reassess monetary tools and gradually retire special measures designed for special times. Policies that target key industries or weak links in the economy will be given long-term support, such as those that promote financial inclusion.

The deficit-to-GDP ratio will increase to 3 percent from last year’s 2.8 percent. Local government special-purpose bonds will target 3.8 trillion yuan. Last year the government aimed for 3.65 trillion but issued 4 trillion.

The government will pay for the higher spending by making use of the profits made by state-owned banks. It also plans to give more money to local governments whose financials have been significantly weakened by last year’s pandemic control measures.

Consumption

Domestic demand drives consumption as exports weaken

Reviving and boosting consumption will be the first order of business. This will be achieved by increasing incomes and making it easier for people to make big purchases. Consumption declined 0.2 percent in 2022 and contributed to only 32.8 to total GDP, significantly lower than 2021’s nearly 60 percent.

Investment, including infrastructure spending, will continue to play an important role in stimulating the economy. Total fixed asset investment increased by 5.1 percent last year despite a 10 percent drop in real estate development, thanks to strong increases in infrastructure (11.5 percent) and manufacturing (9.1 percent).

The report added redeveloping old neighborhoods, building parking lots and increasing the number of EV charging stations as new ways to boost infrastructure spending. Another addition is rejuvenation investment by non-state businesses, which grew by only a historic low of 0.9 percent last year.

There is declared support for small and medium-sized companies and family-owned businesses, as the government sets out to create a competitive but fair environment to restore market confidence.

Foreign investment

Direct foreign investment - new section in report

Foreign investment is frequently mentioned as a priority on important occasions, reflecting the government’s determination to support investor confidence in an uncertain global environment. Two goals are listed for this year – joining major trade agreements such as the CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) and ensuring fair treatment for foreign businesses.

Although direct foreign investment has maintained fast growth in recent years – by 9 percent and 20 percent in 2022 and 2021 – the underlying makeup shows some worrying signs. Three-quarters of direct foreign investment was channeled through Hong Kong last year, up from only 35 percent twenty years ago. Investment from the US, Germany and Japan combined shrank to only 4.6 percent of the total, a fifth of the 21.3 percent seen at the beginning of the century.

Real estate

Market will not be allowed to run wild again

Real estate policy this year is centered on delivering affordable housing for young people and managing risk. Risk management will be achieved by reducing large developers' borrowing and mitigating risks imposed by those developers. They should improve their debt-to-asset ratios and refrain from “unchecked expansion.”

There has been a subtle shift in tone since last year on the housing market. Last December, the Central Economic Work Conference called for “policies tailored to local conditions” to make sure that developer financing needs are met so that houses already paid for are delivered. These are not mentioned in the report.

The market is showing signs of recovery. PBC deputy governor PAN Gongsheng confirmed this in a conference earlier this month. Transactions are up and developer financing has significantly improved.

Financial risk

Preventing major financial risks is a top priority

Small-to-medium-sized financial companies, large real-estate developers and local governments deep in debt are the three major sources of risk.

Right now, all three are said to be manageable, but the number of high-risk financial companies is down to 300 from 600 three years ago. Developer loans are increasing at a slower pace. Overall government leverage ratio is 50.4 percent, still low compared to the rest of the world, and only ten provinces have debt-to-GDP ratios higher than 40 percent.

The report suggests two measures to address the local debt issue. One is to prevent debt from snowballing by working out an interest payment schedule. The other is to gradually pay down the principal.