China GDP hiccup would have long-term aftershocks

Keep planning. China loves to set itself different goals with an array of plans. Its GDP growth target of "around 5%" for this year is the most imminent - and is facing headwinds. Beijing now treats such a measure more as a planning tool than the compulsory target it used to be. Yet a slowdown is still likely to prompt policy changes to keep on track longer-term plans, such as doubling per-capital GDP by 2035.

An impressive 5.3% growth for the first quarter this year prompted a lot of bullish calls from international banks. For instance, UBS only upgraded its forecast on China’s growth from 4.6% to 4.9% in April. Yet in a research note published last week, the same economists including Wang Tao revised their estimate back to 4.6%. The swing in sentiment is primarily due to a deeper-than-expected property slump. Feel-good factors after the Chinese government’s policy combo to prop up the market, including easing mortgage rules and allowing local governments to turn unsold homes into welfare housing, have also faded.

The key word in the State Council's annual growth target more recently is "around". That probably gives economic managers enough leeway this year to argue they accomplished the objective should the headline number eventually come above 4.5%. And it helps that Beijing did not put a figure on how much bigger GDP should get in the country's 14th Five-Year Plan, which runs from 2021 to 2025.

Back in 2021, though, President Xi Jinping said it’s entirely possible for China to meet its longer-term goal of doubling the economy or per capita income by 2035. To do so, the world’s second-largest economy has to keep growing at a pace of around 4.8% for 15 years, per Breakingviews calculation. That's a tall order.

Should the $17 trillion economy expand significantly below 5% this year, that would be the second miss since 2022 when Beijing prioritised pandemic control over growth. Chinese planners will be keen to stop the hiccups from becoming structural woes. The intensity of their potential policy reactions, such as more generous fiscal spending on welfare to boost consumption, will tell how worried they are about misses becoming more prevalent.

Context News

UBS reckons China’s economy will expand by 4.6% in 2024, compared with an earlier forecast of 4.9%. “We expect weaker property activities to have a bigger drag on the overall economy than earlier expected, including through household consumption,” economists at the Swiss bank including Wang Tao wrote in a research on Aug. 28. The State Council set a growth target of “around 5%” for 2024. China’s GDP grew 4.7% in the second quarter and 5.3% in the first three months of the year.