In the upcoming National People’s Congress meeting (NPC), starting March 5, we expect the government to reiterate the priority of supporting growth and call for more policy support. In our current baseline GDP forecast of 4.9%, we expect the meeting to set the GDP growth target at “around 5%” with supportive macro policies, including a slightly higher headline fiscal deficit at 3% of GDP, a small increase of new special local government bond quota to 3.7 trillion yuan ($537 billion) to 3.8 trillion yuan and more property policy easing.
We assume one more required reserve ratio (RRR) cut, no policy rate cut but a small loan prime rate (LPR) cut, and a modest rebound in credit growth to 10% in 2023. We see more measures boosting consumption but no nationwide major consumption stimulus or income subsidies. Restoring confidence, innovation, and self-reliance in supply chain will be the key policy focus.
Our baseline forecast and key policy assumptions
In our baseline forecast, we expect China’s GDP growth to rebound to 4.9% in 2023. For key policy assumptions, we expect the upcoming National People’s Congress meeting to largely follow the stances in the Central Economic Work Conference (CEWC) last December, and set the following policy targets and tones.
As highlighted in the CEWC, growth stabilization is set to be the top priority for macro policies this year. Given external downward pressure and domestic uncertainties, the government may set a prudent growth target of “around 5%” for 2023, leaving some space for over-performance.
The CEWC called for “forceful and effective” fiscal policies, keeping “necessary” strength of fiscal spending, while containing local debt risk. We expect the headline general fiscal deficit to edge up to 3% of GDP and new quota of special local government bonds to increase a bit to 3.7 trillion yuan to 3.8 trillion yuan. Fiscal multiplier is likely higher in 2023, and infrastructure investment growth however may moderate to 5% to 6% from 11.5% in 2022. Augmented Fiscal Deficit may continue to expand by less than 0.5 percentage points in 2023 from an increase of 2.7 percentage points in 2022, while the cyclically adjusted fiscal impulse may be stronger this year.
We expect the NPC meeting to keep the tone of “prudent” monetary policy again, but with explicit easing bias and more “accurate and effective” measures, including ample liquidity conditions, more credit support (e.g. via on-lending facilities) for the real economy, especially small and medium-sized enterprises (SMEs), innovation, and green development, and keeping total social financing (TSF) and M2 money supply growth “largely compatible” with nominal GDP growth. We expect potentially one RRR cut but no policy rate cut, while the LPR rate may be lowered slightly by 5 to 10bps. We expect credit growth to rebound to 10% in 2023 from 9.5% in 2022, leading to another 7 to 8 percentage point increase of debt/GDP ratio in 2023 after a rise of 9 to 10 percentage points in 2022.
Boosting consumption is the key focus, but no major consumption stimulus or income subsidies are expected. The meeting is likely to prioritize “reviving and expanding consumption” in 2023, especially in property upgrading, electric vehicle (EV) sales, elderly-care and other major services (education, healthcare, culture, sports, etc.). We expect more support for employment, household income and consumer credit, while the government may remove some obstacles for consumption recovery, such as relaxing restrictions of auto license plates in large cities. In our baseline, we think there will be no major nationwide large-scale consumption stimulus or income subsidies in 2023, while some local governments may roll out consumption coupons.
More property policy support to boost home sales is likely. Since the major property easing in last November, developers’ financing condition has improved significantly. We expect the NPC meeting to continue its easing bias in property policy, despite keeping the “no speculation” stance. We see additional property policy easing to come to boost home sales, especially for “fundamental and upgrading demand,” including further lowering of mortgage rates, reduction of down-payment requirements, relaxation of home purchase restrictions in more higher-tier cities, and more credit support for stalled projects from policy banks and commercial banks. Overall, we expect property sales to stabilize at low levels in the coming months and rebound sequentially from the second quarter onwards, while the 2023 full year property sales may still decline by 3% to 8% from 2022.
Restoring confidence, boosting innovation and self-reliance in supply chain will be a focus. We expect the NPC meeting to reiterate the government’s long-term commitment to supporting non-SOE development, welcoming foreign investors and investment, and underpinning development of platform enterprises. For the latter, the government may continue calling for rapid development of the digital economy and policy support for platform enterprises. On the other hand, the NPC meeting may highlight the importance of safety consideration in China’s industrial policy, while innovation and tech policy should focus on self-reliance in key technologies and components with bottlenecks. As highlighted in the CEWC, new energy, AI, biomanufacturing, green economy, and quantum computing are important frontier areas to receive more policy support.
Possible upside surprises in the NPC meeting
As we highlighted before, policy settings in the NPC meeting could surprise on the upside. Recent policy tones and senior government officials’ speeches have been more pro-growth. The incoming new State Council may roll out more supportive policies to ensure a robust growth recovery amid the slowing global demand and external uncertainties. What upside policy surprises may there be during the NPC meeting and after?
The growth target may be set at “above 5%” or “around 5.5%,” which is more ambitious than our baseline assumption of “around 5%.” It would require more supportive measures to boost both consumption and investment growth in 2023, especially if/when exports weaken more than government’s expectation.
General fiscal deficit may exceed 3% of GDP, while new quota of special local government bonds may reach 4 trillion yuan or more. More importantly, the government may rely more on policy banks to provide credit support to infrastructure, possibly rolling out additional batches of special infrastructure funds on top the 600 billion yuan already introduced in 2022. This may not be revealed until after the NPC meeting. Infrastructure investment growth may be more resilient than our baseline assumption of 5% to 6% in 2023.
Following an upside surprise in January new credit, monetary and credit policy may be more supportive than our baseline assumption. The latest Monetary Policy Report also seems to be more pro-growth. The People’s Bank of China may continue to use the deposit rate mechanism to help banks to lower deposit rates and overall liability cost, so that LPR may be cut more than our baseline assumption of 5 to 10bps. With potentially more lending by policy banks, credit growth may reach 11% or higher this year.
Although the likelihood of nationwide large scale consumption subsidies and/or income subsidies is low, more local governments could roll out more consumption coupons, some kind of automobile or home appliance subsidy scheme may be possible, and there may be potentially some income subsidies to low-income groups.
China’s GDP growth may be stronger than our baseline forecast. Should the upside policy surprises materialize in the NPC meeting and after, China’s GDP growth may rebound to 5.5% to 6% in 2023, stronger than our current baseline forecast of 4.9%.
Wang Tao is the head of Asia economics and chief China economist at UBS Investment Bank.
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