The National People's Congress kicked off its annual session on Tuesday March 5^th. Chinese premier Li Qiang delivered “The Government Work Report” by unveiling key economic targets and policy priorities for the year. Facing numerous economic challenges, the government remains focused on stabilizing growth while transitioning to high quality development.

Key economic targets

Real GDP: China set a GDP growth target of around 5% for 2024, raising expectations that officials will continue unlocking stimulus to bolster confidence.

Fiscal Deficit: China set fiscal deficit at 3% of GDP, down from last year’s realized deficit of 4.6% of GDP. This is close to RMB4.06 trn, an increase of RMB180 bn from 2023 fiscal budget. Public expenditure targeted at RMB28.5 trn, an increase of RMB1.1 trn from 2023. Special local government bond allocated at RMB3.9 trn, an increase of RMB100 bn from 2023.

Authorities signaled their aim to "balance growth and risk prevention" through incremental support. We think 2024 fiscal deficit will likely surprise to the upside given economic woes from ongoing property correction and  potential elevated US China trade tensions.

Inflation: Policymakers set the 2024 inflation target at 3% vs. realized 0.2% in 2023. Subdued inflation last year was largely due to lower energy and food prices. These drags are expected to gradually fade as output gap narrows and the effects of falling commodity prices dissipate. Yet maintaining headline inflation at 3% will hinge critically on stabilizing the property sector. A continuing downturn in real estate could further weaken private demand  and create disinflationary pressures through adverse feedback loops.

Employment: Policy makers set 12 million new urban job creastions, in line with 2023, and an unemployment rate of 5.5%, an increase of 0.4% from 2023. The rise in targeted unemployment rate shows the stress in the labor market, especailly critical for China’s youth. As manufacturing and construction jobs decline with the economic transition, opportunities have not grown sufficiently in the higher-skilled services sector. Regulatory shifts have additionally reduced openings in formerly vibrant industries such as property, technology, education and finance. Currently, the pace of new job and wage growth remain sluggish. The surplus of household deposit balances is only anicipated to circulate back into consumer spending when conditions in the labor market and wider economy strengthen.

Key policy priorities

A noteworthy measure was the planned issuance of RMB1 trn in ultra-long special central government bonds. With local governments facing fiscal constraints, national borrowing through the credibility of central debt makes structural sense, especially given low financing costs onshore. This will be utilized in China’s strategic sectors to aid China’s high quality development goal. 

Additional issuance may inflict liquidity squeeze and fuel the CNY rates, thereby restraining the credit growth. As such, there will be another 50bps RRR cut, which is equalivalent to around RMB1 trn injection, in our view. The PBOC will also likely cut the policy rates in 2H24 to keep funding costs in check. As such, CGB yields will likely remain stable with downward bias in near-term.

Key emphasis on long term growth drivers

The report highlighted another key facet of China's economic evolution - its dominance in “new three” industries central to sustainable growth. Exports of solar, electric vehicles and batteries grew 30% yoy in 2023. In our view, the "new three" industries will play a crucial role in the country’s ongoing economic growth and clean energy leadership.

China dominates these fields globally, commanding over 80% of solar exports, 50% of batteries, and 20% of electric vehicles. Early investments and consistent state support established robust supply chains, granting Chinese companies substantial cost advantages versus Western competitors due to economies of scale. As traditional industries slow, China consolidates as the premier player in these strategic new sectors powering the future of green technology.

Key efforts to attract foreign investment

The Work Report also stated that efforts will continue to reduce the negative list for foreign invesment, fully open manufacturing to foreign capital and ease market access in sectors inlcuding telecoommunication and healthcare. Signaling China’s openness for business is prudent given foreign direct investment declined for the first time in over a decade in 2023. Structural changes also point to further liberalization. China's aging population, resulting in increased public spending and decreased labor force participation, is expected to diminish national savings. The younger generation's higher consumption propensity may further diminish savings. Fintech development and improved access to credit for spending will exacerbate this trend. These converging forces signal China's colossal savings pool may erode in the longer term.

Conclusion

We think the targets from the Government Work Report are a combination of “relativley bold” GDP target, but “restrained” fiscal deficit, and prudential monetary policy. In our view, persistent downward economic pressure requires persistent easing from the Chinese policy makers. Therefore, we foresee both monetary and fisal policies will have to surprise to the upside in 2024 to achieve the goal of stablization and high quality of growth. 


To read the full report, click here to Download the PDF.