China’s premier offers bleak outlook as GDP target hopes fade

Latest official data showed a contraction in industrial output for the first time since 2020 and a jump in the surveyed jobless rate to 6.1% in April, close to a record.
Image: Bloomberg

China’s Premier Li Keqiang gave his starkest warning yet about the economy as it comes under severe strain from Covid outbreaks and lockdowns, suggesting the government’s growth target is moving further out of reach.

Li held an emergency meeting on Wednesday with thousands of representatives from local governments, state-owned companies and financial firms, calling on them to do more to stabilise growth. He said the economy is in some respects faring worse than in 2020 when the pandemic first emerged and urged more efforts to reduce a soaring unemployment rate.

Li’s warnings add to expectations that Beijing may admit to missing its gross domestic product target by a large margin this year as it keeps its focus on controlling Covid-19 infections through stringent controls. Economists surveyed by Bloomberg forecast the economy will grow 4.5% this year, well below the government’s target of about 5.5%.

Li’s bearish comments initially weighed on stocks, with the CSI 300 Index dropping as much as 1.1% in early trading, though it later erased losses to trade up 0.6% by the midday break. China’s 10-year government bond yield extended its decline for a fourth day to 2.75%.

“It’s obvious that Li was very worried, as he ordered all possible ways to stabilise growth, jobs and businesses as soon as possible,” said Raymond Yeung, chief economist for Greater China at Australia & New Zealand Banking Group Ltd. “But the State Council can only do their best under the unchanging framework of Covid Zero, and it ultimately depends on the transmission of the virus.”

The premier highlighted the economy’s weak performance, saying “economic indicators in China have fallen significantly, and difficulties in some aspects and to a certain extent are greater than when the epidemic hit us severely in 2020.” He called on officials to ensure unemployment falls and the economy “operates in a reasonable range” in the second quarter of this year, state media cited him as saying.

Latest official data showed a contraction in industrial output for the first time since 2020 and a jump in the surveyed jobless rate to 6.1% in April, close to a record. High-frequency data for May showed the economy remained in a deep slump, according to Bloomberg’s aggregate index of eight indicators.

“The economy is at its most grim moment since the second quarter of 2020,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong Ltd. “The meeting was not intended to announce more policy measures, but instead to strengthen the consensus, flesh out the details and urge the implementation of policies to ensure all existing policies are taking effect.”

State media echoed Li’s plea on Thursday to boost growth. China has to take more strenuous effort to achieve this year’s economic growth target, and all work on stabilizing employment and helping small businesses needs to accelerate, the Economic Daily said in a commentary. The newspaper is affiliated with the State Council, China’s cabinet.

Li’s emphasis on growth in the second quarter may be an “implicit acknowledgment” that the growth target set in early March will be “challenging,” Goldman Sachs Group Inc. economists wrote in a note. “Chinese policy makers are in greater urgency to support the economy after the very weak activity growth in April, anemic recovery month-to-date in May, and continued increases in unemployment rates.”

The meeting is the latest in a series of calls by Li to support growth, which has come under enormous pressure since March from Covid outbreaks and President Xi Jinping’s commitment to Covid Zero, requiring strict restrictions on activity where outbreaks occur. Li said that economic data for the second quarter would be released “accurately” — amid some suspicion that official data could be massaged to appear less bad.

The premier indicated that China will try to reduce the economic impact of its strict coronavirus control policies, without specifying how that would be achieved.

“At the same time as controlling the epidemic, we must complete the task of economic development,” he said.

Beijing has never admitted to missing its annual growth target by a large margin since it began setting such goals more than three decades ago, with only one narrow miss previously reported in 1998. It didn’t report a target in 2020, when the pandemic first hit.

Beijing has also never revised the GDP target during the year. The target is part of the government’s work report, approved by the National People’s Congress, the Communist Party-controlled parliament. So if it were to be changed, it would likely need approval by the NPC’s standing committee.

Officials have been de-emphasizing growth in favor of other priorities such as national security and controlling financial risks, so missing the target may not be a major political risk for Xi as he seeks a third term as leader at a Communist Party congress in the fall. Xi wrote into a key Communist Party document last year that GDP growth should no longer be a “sole criterion of success.”

In a State Council meeting on Monday, Li outlined 33 support measures to help businesses, including more than 140 billion yuan ($21 billion) of additional tax reductions including one for vehicle purchases. Local governments were told to spend most of the proceeds from 3.65 trillion yuan of bonds used mainly for infrastructure by the end of August. Li said more detailed instructions on how to implement those policies would be issued this month.

The central bank and banking regulator also held a meeting with major financial institutions on Monday to urge them to boost loans. State media reported following the meeting that some banks had been handed specific quotas requiring them to accelerate loan growth.

© 2022 Bloomberg

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