Major Banks Doubt Chinese Potential GDP Goal Is Reachable
By Ye Xie, Bloomberg Markets Live Reporter and Analyst
Beijing is widely expected to set the growth target this year at 5%-5.5% when top officials lay out their economic policies at the National People’s Congress starting this weekend. A number of high-profile economists at Goldman Sachs, Nomura and Bank of America are skeptical that such a target is attainable. It underscores the challenges Beijing is facing with significant constraints from its housing and Covid policies.
In retrospect, many investors underestimated the significance when Beijing set its 2021 GDP target at a low level (“above 6%”) earlier last year. It turned out that Beijing planned to take advantage of the relatively strong post-Covid recovery to unleash a range of far-reaching and economically costly reforms, from regulatory crackdowns in tech industries to housing deleveraging. China managed to grow 8.1% last year. But by Q4, growth decelerated to an annualized 4%, well below the potential GDP that officials estimate to be about 5%-5.7%. The MSCI China Index lost 23% in 2022 and defaults by developers soared.
The priority for this year has shifted back to stabilizing the economy. Based on the growth targets released by provinces earlier, most economists expect the GDP goal this year to be set between 5% and 5.5%. The consensus in a Bloomberg survey is for a growth rate of 5.2% this year.
But a number of prominent investment banks think reaching 5% will be challenging. Nomura kept its growth estimate at 4.3%, the lowest in the Bloomberg survey. Forecasts from Goldman (4.5%), Citigroup (4.7%), Barclays (4.7%) and Bank of America (4.8%) are all at the low end of the spectrum.
The skepticism stems from questions about how much China can stimulate the economy, without significant changes to its restrictions on housing and Covid policies. “We expect Beijing to set this year’s GDP growth target at ‘around 5.5%,’ which, in our view, is too high to realistically achieve,” wrote Nomura’s economist Lu Ting and colleagues.
There seems to be a softening tone on both policy fronts recently. Dow Jones reported officials are exploring ways to exit from the zero-Covid policy. Guo Shuqing, the chairman of the China Banking and Insurance Regulatory Commission who last year warned that the real-estate bubble is the biggest “gray rhino,” suggested this week that he doesn’t want adjustments in the housing sector to be “too drastic.”
But under the mantra that housing is not for speculation, it’s hard for China to drastically spur home demand. And any potential change in the Covid policy later this year may come too late to help growth in 2022.
China rarely misses its GDP target. Justin Yifu Lin, a former chief economist at the World Bank, said last month that keeping a relative high speed of growth in the foreseeable future is a political task and that allowing China to grow slower than the U.S. (the Fed forecasts GDP this year at 4%) may affect confidence. How to get there, tough, is the question.
Thu, 03/03/2022 – 22:31