If China’s 2022 economic targets are any guide, the country is looking at a year of slowing growth, rising inflation and a projected big rise in government spending to stop the economy stumbling into stagflation.
The targets, confirmed on Saturday at the National People’s Congress in Beijing strongly suggest 2022 is going to be a tough year for the world’s second biggest economy.
On its own way the government has ignored the impact of the surge in commodity prices following the Russian invasion of Ukraine and western sanctions against Russia – but it did signal its concern by leaving the consumer inflation rate target unchanged at 2021’s 3% — even though it was less than a third of that rate in last year and in January in the first data release for 2022.
That’s a clear acknowledgement that the country faces a rising challenge from rising raw material costs this year – especially energy.
Trade data for January and February (combined because of the week long Lunar New Year break) later today will give us a glimpse of any impact in the size of the import bill and actual volumes.
“In our work this year, we must make economic stability our top priority and pursue progress while ensuring stability,” Premier Li Keqiang said in the work plan presented to the 2022 National People’s Congress.
Two mentions of the word ’stability’ in the one sentence tells us how concerned the Government of Xi Jinping is about the possible blows to the economy and the country from the unsteady markets and prices.
The budget deficit is projected to fall to 2.8% of GDP from 3.2% in 2021, there will be one trillion yuan in tax cuts and charges for small and medium business but in the most telling target of all, government spending is projected to jump by more than 8% from the actual 1.8% rise in 2021.
Spending on defence will rise by a sharp 7.1% (to about $US229 billion), according to the projections revealed at the weekend. That naturally got a lot of attention in the US.
According to the government’s plan (but not really acknowledged in the commentary) the pace of annual growth this year is expected to slow sharply to “about 5.5%” compared to the actual outcome for 2021 of 8.1%.
The new target is not only down from 2021’s target of “over 6%” but also the actual outcome of 8.1%.
The new target “around 5.5%” includes estimations of the impact of higher spending by various levels of government. growth clearly would be lower without the contribution from the expected 8% plus rise in central government outlays.
Mr. Li acknowledged that the Chinese economy would face challenges this year, pointing to the sluggish recovery of consumption and investment, flagging growth in exports and a shortage of resources and raw materials.
By the last three months of last year, the economy was growing only 4% and it’s doubtful there has been any real improvement early in 2022.
China’s construction industry is stalling as home buyers stay on the sidelines and developer debt default rise. The government is now in charge of the restructuring of the property sector and will have to organise a way to bury hundreds of billions of dollars in debts, defaults and trading losses.
Falling revenues from land sales have seen some local governments curtail spending on new roads and other infrastructure.
Continued lockdowns and travel restrictions to prevent the coronavirus from spreading have caused a downturn in spending at hotels and restaurants as well as some parts of retailing such as car sales.
Inflation is being boosted by rising oil and petrol prices.
The Consumer Price Inflation target was unchanged from 2021’s 3% but will be up sharply from last year’s actual 0.9%.
2021’s CPI was low because of the slide in pork prices as China recovered from two years of trying to control African Swine Fever in its pig herd – which meant killing 48% of the lot and then breeding replacement animals, many of whom came to market from May-July onwards, depressing food prices and the CPI.
The CPI in January fell to an annual rate of 0.9% from December’s 1.5% but this was before the explosion in commodity prices – led by gas, coal, all metals and especially oil in the wake of Russia’s invasion of Ukraine.
Besides the repeated use of the word ‘stability’ the work report contained other new language which has made the government’s approach to supporting the economy this year quite clear.
For example the report said China will expand the scale of new loans and make it easier for market entities to access financing, both indicates this year’s credit growth rate will be significantly higher than last year’s, 1.6% rise in new loans to $US3.1 trillion (in bank loans).
Analysts quoted in official media pointed out that China’s fiscal and monetary policy arrangements are expected to provide stronger support for the economy to progress steadily, while leaving sufficient room for tackling various risks and uncertainties.
“Macro policies should be kept consistent and made more effective. The proactive fiscal policy should be more effectual, more targeted, and more sustainable. The prudent monetary policy should be both flexible and appropriate, with reasonably ample liquidity being maintained,” the government work report stated.
But there is an inconsistency – the budget deficit will fall to 2.8% of an economy that is forecast to grow by ‘about’ 5.5% from 2021’s 3.2% share of an economy that grew 8.1%. 2022’s settings are going to end up being contractionary.
The government also sets an unchanged annual quota for local government special bond issuance at 3.65 trillion yuan ($US578 billion) – that is not expansionary.
The latest work report also repeatedly emphasised the prevention and defusing of major risks such as an expected weakness in domestic activity and the problems in real estate, not to mention higher inflation and external shocks to trade (and surging commodity prices which are a late comer to the list of risks).
The Global Times (the Government’s tabloid mouthpiece commented “the Russia-Ukraine conflict is still fermenting, international commodity prices may be further pushed up, and the foreign exchange market is still facing the risk of turbulence, all require China to be fully prepared in terms of its macro policies.”
That’s the real challenge for China this year – the performance of the economy will be a month-to-month proposition and much of that uncertainty will be down to Xi’s strong (and cunning) support of Putin and all the threats and costs to the economy and China’s wellbeing.
