The highly anticipated annual China’s National People’s Congress (NPC) kicked off on 5th March 2023. Many market participants are watching this event closely, as political leaders gather to unveil economic targets as well as broad policy direction. It will also culminate in the biggest government reshuffle in a decade, with announcements of new leaders and appointment holders of key ministries towards the end of the meetings at around 13 March.
In this article, we highlight the three key topics that were addressed on day one of the “Two Sessions” meeting and the potential market implications.
1. Conservative Gross Domestic Production (GDP) target of around 5% in 2023
While this does not come as a surprise, investors may be disappointed by the conservative target, as consensus would have hoped for a higher target at 5.5% to make up for the slow growth last year. One could argue setting the growth target towards the lower end of expectations could indicate that regulatory crackdowns that had been implemented over the past two years are not over. That said, we are of the view that it is more likely the government does not want to over-stimulate the economy after reopening, as policymakers aim to achieve both qualitative and quantitative improvement of its economy this year. Another reason behind the modest growth target could be due to the fact China missed its “5.5%” growth target in 2022 on the back of zero-covid measures and global economic slowdown.
2. Measured Fiscal and Monetary Stimulus
Fiscal deficit target in 2023 will be 3.0% of GDP, higher than 2.8% in 2022, in line with consensus expectations. The quota for special local government bonds is set at 3.8 trillion yuan, a touch above 3.65 trillion yuan in March 2022 fiscal budget. As we may expect the fiscal expenditure to be lower in areas such as pandemic-related support, we are watching where the resources may be ploughed into this year, for example consumption stimulus, green developments and/or Research & Development (R&D) upgrade.
On the monetary front, inflation target remains unchanged at “around 3%”, with the assessment that inflation will stay under control in 2023. M2 and Total Social Financing (TSF) growth will be in line with nominal GDP growth.
3. “Housing is for living in, not for speculation” stance was not mentioned
Narrative remains similar to that at the Central Economic Work Conference (CWEC) in December 2022 – risk management remains as primary priority. The government highlighted that risks still exist in the property market, and it will target “unregulated expansion” in the sector. That said, probability of a property crisis in China has been abating with policy pivoting towards supporting the real estate sector. Key measures announced late last year included stable financing to developers, financing for project completion, managing risks of financially distressed property companies, and protecting the rights of homebuyers. We see these measures as helpful in easing the credit crunch and promoting a gradual recovery in the property sector.
Investment Implications
Conservative targets announced so far may disappoint investors in the short term, and markets have little catalyst to grind materially higher. While there is no policy “bazooka” to give a sudden acceleration in economic growth, there is a focus to achieve stable and sustainable medium-to-long term growth as highlighted by the frequent use of the words “development” and “stability” during the meeting. There is no surprise so far and we remain positive on China equities in 2023.
What to Watch
All eyes on 1) appointment of State Council new team (March 11-12); 2) press conference by the new government leaders (March 13).
Footnotes:
*M2 refers to a measure of money supply that includes cash, checking deposits, non-cash assets that can easily be converted into cash. Source: M2 Definition and Meaning in the Money Supply (investopedia.com)
All data are sourced from Lion Global Investors and Bloomberg as at 6 March 2023 unless otherwise stated.
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