When China sneezes, the world catches a cold
World’s second-largest economy based on GDP, China is a force to reckon with. The country accounts for close to 20% of the global economy. Known as the factory of the world, it is the largest manufacturing economy and exporter of goods. It also boasts of the world’s fastest-growing consumer market and accounts for half of the global consumption of metals. We cannot emphasize enough the importance of China to the world but the fact remains that every nation keeps a tab on what China does as its growth is linked to the world’s growth. And when this nation sneezes, the world catches a cold. This cold that China is engulfed with is unfortunately lasting longer than what the world had predicted.
Dragon fizzling down
2022 was not a great year for the Chinese. Lingering lockdowns and zero covid policies weighed on the Chinese economy. The nation managed to clock less than 3% GDP growth last year, a serious fizzle down from the pre-pandemic era. Naturally, folks around the world had BIG hopes of a turnaround, especially after sentiments were boosted in the last 2 months when China decided to kick away lockdowns and announced a full bang re-opening. But economists were extremely disappointed by the government’s 5% GDP growth target for 2023, the lowest in more than 30 years. The modest growth prediction is surprising given that it is on a low base. Amid slowing global growth and an impending recession fear, investors were hoping that a China bounceback would provide a much-needed respite. Now, this confidence has also been shattered.
From over-optimism to underconfidence
The 5% target announcement came at the start of the annual gathering of the national legislature, where President Xi Jinping is poised to secure even more power. The GDP target compares to last year’s goal of around 5.5%, which China missed by a large margin due to covid led disruptions and the property crisis.
Some takeaways from the budget announcements are:
Military spending outpaces economic growth
2023 defense expenditure will increase by 7.2%, an increase for the eighth year in a row. Spending on the People’s Liberation Army has increased by at least 6.6% each year for the past three decades, at par or often exceeding GDP growth.
The focus shall remain on improving military training and readiness for conflict as well as fast-tracking several defense projects amidst tensions with the US on a range of issues including Taiwan. China’s defense budget is closely watched worldwide especially by India as border issues between China and India have harmed the two nations’ relations.
Property sector to be tamed
The previous two years have seen a decline in the real estate industry in China as a result of the crackdown on developers’ excessive reliance on debt for growth. China will continue to target disorderly expansion in the real estate sector, to defuse any potential financial risks.
Weak real estate sectors cast a dark shadow on China’s economic growth (which forms more than a quarter of its GDP) and will continue to pose a downward risk on its growth targets.
Wooing the tech
The Budget proposed a modest boost for the technology industry as well as an acceleration of the building of hard tech infrastructure, such as in artificial intelligence, 5G, and big data.
China’s tech sector has recently been the target of a protracted government crackdown. Li also stressed the importance of reviving private consumption and stabilizing expenditure on “big-ticket products”.
Why such a low target?
To meet if not beat
We feel there could be several reasons for aiming low. This could be an indication of cautiousness among policymakers. They are trying not to get too confident from initial growth numbers seen for the past few weeks. After all, since 2019 the Chinese economy has not been able to beat the official growth targets like before. So best to meet if not beat the target.
Tackle problems from the roots
The conservative targets could mean that the pressure to roll out monetary and fiscal support could be reduced, providing more room to tackle structural issues, particularly the real estate crisis.
Global headwind
Another trend fast emerging post-pandemic is a potential exodus of companies from China to friendlier countries like Vietnam and India. We have already seen global giants like Apple and Samsung making big-buck investment announcements in India. Due to the deteriorating investment environment and tensions between US and China, this Asian country is no longer the primary investment destination it once was.
While this shift will take a long time, 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 could be a slow but deepening drag on China’s potential growth rate in the future. This nervousness is visible when the policymakers pitched for attracting foreign investors and FDI into China and making sure the environment remains conducive for foreign companies.
Conclusion:
China is confronting a host of challenges as it looks to revive its COVID-battered economy. From a looming property sector crisis to a declining working population and reduced investor confidence, the challenges are aplenty. China will therefore have to look beyond yearly targets and solve some of these teething issues to be able to truly come out of sluggishness. China has an uphill battle ahead and the 5% GDP growth target could be the lowest hanging fruit for them at the moment.
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