Understanding China’s GDP Growth Target from Multi-Dimensional Perspectives
Author:Zhong Zhengsheng Zhang Deli
The growth of China’s GDP set by the 2022 Report on the Work of the Government is at around 5.5%，within the market’s top expectation ranging from 5.0% to 5.5%. This reflects the central government's determination and confidence in stabling the economy. However，since the release of the satisfactory economic data in January and February，the market has been heated up，which shows that the actual effect of the policies of stable growth up till now has fallen short of the expectation. So，what are the reasons behind the growth target of around 5.5% this year，and what are the constraints and paths to achieve it? These are right the questions we are going to answer in this article.
Reasons for Setting the 5.5% Growth Target
Possible reasons behind the relatively high GDP growth target are as follows: First，to maintain the coherence of the GDP growth target. So far since 2011，the GDP growth target has been either unchanged or only 0.5 percent lower than the previous year，except for 2020，in which the GDP growth target was not set due to the impact of COVID-19. The GDP growth target in 2021 was set at more than 6.0%，so it is scheduled to be around 5.5% in 2022，which is in line with historical laws.
Second，the compound growth rate of China's GDP from 2020 to 2021 was 5.1%. Although still faced by great pressure from preventing COVID-19 in 2022，China is already on its track of returning to normal. Therefore，the GDP growth target in 2022 is higher than the actual compound growth rate of the previous two years，which also reflects the weakening impact of COVID-19，and the convergence of the GDP growth center to the potential economic growth.
Third，to protect market players and stabilize employment. According to a reporter from Premier Li Keqiang，around 16 million people are expected to enter the urban workforce in 2022，which is higher than the 11 million target and the actual employments of 12.69 million in 2021. The expansion of junior college enrollment in 2019 led to an increase of 1.67 million college graduates in 2022 compared with last year. The employment of college graduates，especially junior college graduates，is facing challenges. However，steady employment requires a stable and healthy operation of market players. Therefore，it is necessary to strengthen the adjustment of counter-cyclicals and contribute new orders to various types of market players so as to create more jobs.
Constraints on Achieving the 5.5% Growth Target
China's economic development is facing the triple pressure of "demand contraction，supply shocks，and weakening expectations"，according to the Central Economic Work Conference held in December 2021.
On the demand side，real estate investment and exports，the two driving forces behind the rapid recovery of China's economy after COVID-19 are facing the risk of a slowdown in 2022，real estate in particular. A sustainable domestic consumption recovery remains to be seen in the light of the recent multi-point spread of COVID-19 in China，combined with the expected sluggish employment market，and the actual debt repayment pressure of China’s household sector is higher than that of major developed countries.
On the supply side，geopolitical events have increased the risk of global supplies of commodities such as energy，non-ferrous metals，grains and food. The Nanhua industry index and the Nanhua agricultural index both hit record highs in early March and have fallen back recently but remain at high levels，which would make it more difficult for domestic companies to procure goods and will also increase production cost.
The expectations of enterprises and residents have been improved to some extent due to the easing of the control on both the total amount and intensity of energy consumption，tax rebates and fee reductions，and structural monetary policy tools to support weak links in the economy.
The Path to the 5.5% Growth Target
Since the 21st century，except for the actual year-on-year GDP growth target of 7.4% in 2014，which was slightly lower than the targeted 7.5%，all the other years have achieved the annual growth target set in the Report on the Work of the Government that year. To protect market players and stabilize employment，it is also necessary to "focus on stabilizing the macroeconomic market and keep the economy running within a reasonable range." The 2022 Report on the Work of the Government lays out the priorities for economic and social development in 2022. On March 14，the executive meeting of the State Council divided the 52 key tasks in 44 areas proposed in the 2022 Report on the Work of the Government into the departments of the State Council and relevant localities，specifying responsibilities and the time limit for completion. On March 16，the Financial Stability and Development Committee of the State Council held a special meeting，pointing out that with regard to macroeconomic operation，the decision and deployment of the Party Central Committee must be implemented to effectively boost the economy in the first quarter.
In terms of fiscal expenditure，although the deficit ratio in the narrow sense has been reduced this year，the year-on-year budget expenditure of general public finance and government funds will increase significantly from the actual growth rate of -1.0% in 2021 to 12.8%，which is higher than the real growth rate of 10.1% in 2020，the year that was heavily hit by COVID-19. Specifically，the deficit ratio in the narrow sense is lowered from 3.2% in 2021 to 2.8%，and the deficit in the narrow sense is lowered from 3.57 trillion yuan in 2021 to 3.37 trillion yuan. However，as the transfer funds and the use of the carry-over balance amount to 2.33 trillion yuan，the budget expenditure of general public finance in 2022 will reach 26.71 trillion yuan，an increase of 2.08 trillion yuan over the actual expenditure in 2021，an increase of 8.4% year-on-year.
In terms of fiscal revenue，tax reduction and rebate are expected to reach 2.5 trillion yuan in 2022，exceeding the market expectations. Tax and fee reductions can increase the income of enterprises and residents. In addition to indirectly stimulating fixed asset investment and consumption，the cash flow of taxpayers can also be improved to boost confidence and expectations. Therefore，tax cuts and fee reductions are just as positive fiscal policies as spending expansion. Since the Central Economic Work Conference in December 2021，combined and large-scale tax and fee reductions have been mentioned many times at high-level and important meetings. According to the 2022 Report on the Work of the Government，in 2022，the first task is to continue the implementation of tax and fee reduction policies to support the manufacturing industry，small and micro enterprises and individual industrial and commercial households，and expand the scope of application with tax reduction and exemption amounting to 1 trillion yuan.
If fees and other expenses are taken into account，the annual tax and fee reductions will likely exceed the 1.1 trillion yuan in 2021.
Second，around 1.5 trillion yuan of tax refunds will be set aside in 2022. The research by Wang Zhigang and other researchers (2021) shows that China’s fiscal expenditure multiplier is between 0.58 and 0.67，and the tax multiplier is between -0.22 and -0.18. Based on the median of the two，fiscal expenditure in 2022 will increase by 2.08 trillion yuan and tax cuts will increase by 1 trillion yuan，which will contribute about 1.5 trillion yuan to GDP，driving China's GDP growth by 1.3 percentage points in 2022.
Second，historically，China's credit stability has mostly been ahead of economic stability. At present，the credit easing efforts are still insufficient，and economic stabilization requires further policies.
Real estate is the most important credit accelerator in China. Historical data shows that the 10-year treasury bond yield and the national housing prosperity index are highly synchronized. From January to February this year，the sales amount of real estate dropped by 19.3% year-on-year. In February，the first ever negative growth in new medium- and long-term loans to residents means that the credit cycle is on the track of stabilization and rising，but further policy efforts are still in need.
In terms of aggregate policy，there is still a need for reserve requirement ratio cuts (RRR cuts) and interest rate cuts in 2022. However，in the current complex and changeable internal and external environment，the constraints on monetary easing are strengthening on the edge. Therefore，overall monetary policy tools such as RRR cuts and interest rate cuts may not be the main carriers of credit easing in 2022. The first constraint is that structural inflationary pressures still exist，including the historically high indices in Nanhua industry index and Nanhua agricultural index and the gradual approach of the pig cycle. The second constraint is the tightening and interest rate increase cycles of major overseas central banks. According to the bitmap released after the March meeting，the Fed may raise interest rates by 175bp in 2022. Although China's monetary policy is "me-based"，we still need to be alert to the impact of monetary policy differentiation on the stock，bond and foreign exchange markets.
The focus of easing credit in the future is likely to be on guiding financial institutions to increase support for the real economy and taking multiple measures to reduce comprehensive financing costs. First，optimize the direction of loans through structural monetary policy tools while expanding the scale of new loans. The 2022 Report on the Work of the Government clearly mentioned "expanding the scale of new loans". The author estimates that in 2022，the new renminbi loans of social financing will be around 23.4 trillion yuan，an increase of 3.5 trillion yuan over the same period in 2021. Second，the new medium and long-term loans to residents in February were negative，indicating an oversupply of housing mortgage loans. It is necessary to continue to guide commercial banks to lower mortgage interest rates in order to avoid further collapse of personal mortgage loans. The third is to promote the "substantial reduction of comprehensive financing costs" in accordance with the requirements in the 2022 Report on the Work of the Government. Specific measures include deepening the market-oriented reform of loan interest rates to further release the dividends of the loan prime rate (LPR) reform，and exempting unnecessary additional costs in corporate loans.
Third，avoid policies that have a shrinking effect on the economy at both the supply and demand ends through industrial adjustment.
In terms of carbon emission reduction，the green transition is significantly less binding on China's economic growth in 2022 compared with 2021. In 2021，there was "movement-style carbon reduction" in many industries and places，with highlights including the demand for crude steel production to decrease year-on-year in 2021，and power cuts in many places in the third quarter of 2021，which affected industrial production and residents' lives. In October 2021，top-level design document for peaking carbon emissions was released，setting the quantitative assessment indicators for the two key time nodes in 2025 and 2030. In general，it is not difficult to achieve carbon peaking，and the top-level design documents also provides guidelines for scientific and orderly promotion of carbon emission reduction. It should be pointed out that the current round of external geopolitical conflicts between Russia and Ukraine also highlight the need to seek a better balance between energy transition and energy security.
The assessment requirements for energy consumption per unit of GDP in the 2022 Report on the Work of the Government are significantly relaxed compared with 2021. This year，the reduction of energy consumption per unit of GDP has not been clarified，but it has been emphasized that the overall assessment should be carried out during the "14th Five-Year Plan" period，with appropriate flexibility. This also continues the arrangement of the Central Economic Work Conference in December 2021，that is，"new renewable energy and raw material energy consumption will no longer be included in the total energy consumption assessment". In the "14th Five-Year Plan"，the energy consumption per unit of GDP in 2025 is required to be reduced by 13.5% compared with 2020. A decrease of 2.7% in 2021 means that energy consumption per unit of GDP will need to decrease by an average of 2.9% per year from 2022 to 2025. In 2020，China's new renewable energy (hydropower，wind power and solar power) consumption will be 45.96 million tons of standard coal，accounting for 0.92% of the total energy consumption that year. Even without considering the increase in the proportion of new renewable energy in the process of energy transformation，based on the conservative data in 2020，it is estimated that only the newly added renewable energy will not be included in the assessment of total energy consumption，which can bring the assessment of energy consumption intensity per unit of GDP in 2022 down to 2.0%.
In terms of real estate，the relaxation after the Spring Festival this year has increased significantly compared with that before the holiday，and there is still room for further relaxation in the future. The purpose of real estate regulation is to "stabilize land prices，housing prices and expectations"，and stable sales are the foundation of a virtuous cycle and healthy development of the real estate industry. While guarding against and defusing the risks of real estate development enterprises，policies that have a shrinking effect on real estate sales should be introduced cautiously. In a recent interview with Xinhua News Agency，some official from the Ministry of Finance stated that "the conditions for expanding the pilot cities of real estate tax reform will not be met within this year"，which has a positive effect on boosting residents' willingness to buy houses. In addition，it is necessary to continue to issue relevant policies under the framework of city-specific policies to promote the "endogenous" recovery of the real estate industry，including reducing the down payment ratio，linking with serving 300 million new citizens and lowering the threshold for house purchases.
In terms of the platform economy，a signal was released on March by the Financial Stability and Development Committee under the State Council to promote a stable and healthy development of the platform economy. Although the platform economy is suspected to have problems such as capital monopoly，insufficient employee welfare protection，violation of user privacy，and high charges of traffic fees，it still plays a certain positive role in absorbing flexible employment and giving full play to its scale advantage to invest in research and development.
The author Zhong Zhengsheng is the Chief Economist in PingAn Securities
The author Zhang Deli is macro-economic analyst in PingAn Securities