China's GDP target of 5.5% for 2022 will be challenging to meet: Economists

China’s goal to achieve around 5.5% economic growth this year is a challenging one, and will push the government to boost infrastructure investment, stimulate property demand and provide more monetary easing, economists say.

The gross domestic product target is higher than economists’ projection of 5.1% expansion for this year, a growth rate that would be the lowest since 1990, excluding the pandemic year of 2020. The economy grew 8.1% in 2021, when the government set a conservative target of “above 6%.”

Here’s a look at what economists are saying about Beijing’s goals, which were released at the opening of the National People’s Congress on Saturday:

Jacqueline Rong, deputy chief economist for China at BNP Paribas SA

“The current growth momentum of the economy is likely lower than 5.5%,” Rong said. “More support from the monetary policy will still be needed.”

She expects the People’s Bank of China to cut the medium-term lending facility rate by 5 basis points in April or May, and lower the ratio of funds banks must keep in reserve by 50 basis points in the second half of the year.

“Even though the focus is on stabilizing growth this year, it doesn’t mean the government will abandon risk prevention and adjustment of economic structure altogether,” Rong said. “The 2.8% budget deficit ratio was obviously set for the sake of medium- to long-term fiscal policy sustainability.”

The deficit target is lower than economists’ median forecast. Rong estimates 3 trillion yuan ($475 billion) to 4 trillion yuan worth of fiscal funds will be carried over from previous years and used to replenish income this year. “So fiscal support for the economy will remain strong even though the budget deficit doesn’t expand,” she said.

Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.

“It will be a challenging year for the government to achieve this growth target. The housing sector is slowing down, and the Covid pandemic has constrained the service sector severely,” said Zhang. “It is not clear how much infrastructure investment can grow in 2022 to offset such adverse effects from housing and Covid.”

The PBOC will likely cut the reserve requirement ratio for banks in the first half of the year, and lower policy interest rates twice this year by 10 basis points each time, Zhang said. The government will probably allow local authorities to relax property curbs, he said. 

The government’s vow to “effectively guard against overseas risks” reflects its awareness of potential geopolitical risks, made clear by the Ukraine crisis and the sanctions on Russia, Zhang said.

Ding Shuang, chief economist for Greater China and North Asia at Standard Chartered Plc.

China set “a target that requires some effort to achieve, unlike last year, which was too low and weakened local governments’ motivation to do things,” said Shuang. “It requires policy support and efforts by local governments.”

“The target is still within the range of China’s potential growth rate,” he said, referring to the the maximum the economy can expand without fueling inflation. The PBOC projected the economy’s potential growth rate is 5%-5.7% in the five years through 2025. 

Chang Shu and David Qu, Bloomberg Economics

“The message from the National People’s Congress is clear -- China’s government is determined to prevent growth slipping too much this year,” the economists said in a report. “The 5.5% growth target -- down from 6% in 2021 -- signals an intent to stabilize an economy facing fierce pressures from a property slump and new risks from the Russia-Ukraine war. The budget targets look conservative on the surface -- but leave substantial room for stimulus that could be even more forceful than the support it delivered in 2020 to cushion the pandemic blow.”

“The 5.5% growth target -- in line with our expectations -- strikes a good balance: it’s not so high as to require shifting already-stimulative policy into overdrive, but not too low, either -- which would undermine confidence.

Liu Peiqian, chief China economist at NatWest Group Plc.

The reduced budget deficit signals “fiscal discipline,” while the unchanged local government special bond issuance quota will “continue to lift the infrastructure investment lever for the medium term,” Liu said.

The monetary policy stance “remains prudent but with a more dovish bias,” she said, forecasting another 20 basis-point reduction in the benchmark interest rate and 100 basis-point cut in the reserve requirement ratio this year. “There is room for stronger policy support if loan growth is soft,” she said.

Zhou Hao, senior emerging markets economist at Commerzbank AG

“Growth in the first half of the year will depend on infrastructure and property, driven by the remaining special bonds issued last year and greater housing demand in smaller cities,” he said. “In the second half of the year, we’ll have to see if the government can relax virus control measures a bit so that domestic demand can catch up.”

The government’s pledge to “step up implementation of the prudent monetary policy” means the PBOC will cut interest rates multiple times but with a smaller reduction each time to ensure stability, he said. His base case is one 10 basis-point cut in the one-year policy rate in the second quarter, with the possibility of more.

Louis Kuijs, chief economist for Asia Pacific at S&P Global Ratings:

“There are a lot of pressures on the fiscal front from all sides,” said Kuijs. “In these circumstances, it seems reasonable and likely the authorities are going to use some of the money that was not used last year. It’s still possible to have a modest increase in the actual overall fiscal deficit.”

“As a short-term response, it’s not unreasonable -- many countries do it, many families also do it -- at tough times, you sometimes use savings from the past. But it’s of course not something you can continue to do for a long period of time.”