China has set its annual growth target at around 5%, an ambitious goal that will pressure its leaders for ambitious stimulus plans as they seek to restore confidence in an economy hampered by a real estate crisis.

Premier Li Qiang acknowledged the challenges facing the world’s second-largest economy as he delivered his first work report to the national legislature at its opening this week. “It is not easy for us to achieve these goals,” he told thousands of delegates gathered at the Great Hall of the People in Beijing. “We need political support and joint efforts on all fronts.”

The consensus anticipates that the economy will likely grow by 4.6% this year. The target of around 5% is likely to boost confidence.
Chinese stocks listed in Hong Kong fell after the announcement of the key targets. The Hang Seng Chinese Enterprises Index fell 3%, the largest drop in over a month, while the onshore CSI 300 index fluctuated between gains and losses before edging up slightly in the afternoon. The yuan changed little both in the domestic and overseas markets.

Adding to these challenges, the 3% inflation target announced at the National People’s Congress means the country is aiming for nominal growth of around 8% this year. In reality, China is grappling with its most extended period of deflation since the late 1990s, meaning the economy only advanced by 4.6% last year before adjusting for inflation. With continued price declines, substantial expansion will be challenging to achieve.

The prime minister has already signalled that officials will not rely on massive stimulus measures to boost expansion as they seek to break the country’s dependence on debt-driven growth.
Nevertheless, some signs of increased support have been observed. China unveiled its intention to issue 1 trillion yuan ($139 billion) of long-term special bonds from the central government in 2024. The report indicates that this rare decision is also planned for the years ahead to support key national strategies. Such a measure has only been implemented three times in the past 26 years, with the most recent occurring in 2020, when authorities issued 1 trillion yuan of these bonds to finance pandemic response measures.

China has maintained its overall budget deficit target at 3%. The deficit will continue to be borne mainly by the central government, increasing transfer payments to local governments to help prevent and resolve risks related to local debt. The Ministry of Finance’s report pledges to firmly curb new hidden debt and orderly settle existing debt, highlighting authorities’ efforts to manage local government balance sheets.
Beijing’s willingness to increase its borrowing to relieve indebted local authorities is not without constraints. Interest payments on central government debt in 2024 are expected to increase by nearly 12% from last year and represent the second-largest expenditure for authorities after the defence budget.

Xi’s mantra that “housing is for living, not for speculation” was omitted from the work report for the first time since 2019 as top leaders seek to stabilize a real estate market that once accounted for about a quarter of GDP. This slogan has been regularly used by officials since 2016 and has become an essential way for Beijing to signal its intention to calm an overheating market.

Authorities have also pledged to “prevent overcapacity” in specific key sectors as companies suffer from reduced profit margins due to falling prices. China’s overcapacity also fuels tensions with its trading partners, including the United States and the European Union.

For decades, China’s economic growth has been formidable. But today, the country is experiencing significant slowdowns, with consequences for the rest of the world. China is changing its economic model amid a complicated international environment and structural paradigm shifts. The challenges are significant, and given the weight of its economy, both happy and unhappy consequences will also translate into the global economy.