China sets modest GDP growth target of ‘around 5.5 per cent’ as economy faces headwinds from COVID-19, Ukraine

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Chinese Premier Li Keqiang set a moderate growth target of “around 5.5 per cent” for this year at the opening of the National People’s Congress in Beijing on Saturday, as the world’s second-largest economy continues to face challenges caused by the pandemic, housing and local government debt crises, and growing repercussions from the war in Ukraine.

China’s GDP grew 8.1 per cent in 2021, above an official target of more than 6 per cent and in line with the more optimistic projections, but a slowdown toward the end of the year led to the fourth quarter seeing the slowest growth since early 2020.

In January, the International Monetary Fund (IMF) predicted China’s economy would grow 4.8 per cent this year. In a report, it said “China’s recovery is well advanced, but it lacks balance and momentum has slowed.”

“The slowdown is attributed to the rapid withdrawal of policy support, the lagging recovery of consumption amid recurrent COVID-19 outbreaks despite a successful vaccination campaign, and slowing real estate investment following policy efforts to reduce leverage in the property sector,” IMF economists said.

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Mr. Li acknowledged the country is facing an increasingly “volatile, grave and uncertain” external environment. But China has had “the experience of facing major risks and challenges in the past,” he told lawmakers Saturday, and the fundamental direction of a thriving Chinese economy “will not change.”

“This year, our country will encounter many more risks and challenges, and we must keep pushing to overcome them,” Mr. Li said, adding the country will prioritize stabilizing growth to cope with new downward pressure.

He said focus will be on social and economic stability to pave the way for the Communist Party’s national congress later this year. Analysts previously predicted a shift away from the more interventionist policies of last year, as China’s leaders turn their attention to the key meeting in November, at which President Xi Jinping is expected to begin an unprecedented third term.

One of the strongest headwinds facing China’s economy last year came from the housing sector, which has long been described as a bubble. With developer Evergrande teetering on the edge of default and collapse, there were fears the contagion could spread through the industry, causing a Chinese “Lehman moment,” similar to the failure of the U.S. financial firm Lehman Brothers that sparked the 2008 economic crash.

While regulators have been able to get things under control, Mr. Li indicated the more aggressive policies against over-leveraging, which had contributed to Evergrande’s sudden decline, would not be going away, emphasizing the country will maintain that “housing is for living, not speculation.”

The country will create at least 11 million new urban jobs in 2022, Mr. Li said, with the aim for an unemployment rate in urban areas under 5.5 per cent. The urban jobless rate at the end of 2021 was 5.1 per cent, but there is a growing divide between rural and urban China, with poverty and unemployment remaining problems across large swaths of the countryside.

There were no indications of a major shift away from China’s “COVID zero” policy, which has seen the country largely cut off from the rest of the world and severely dampened domestic consumption just as Beijing is trying to shift away from a reliance on exports.

“If China maintains its zero-COVID policy, services could face extreme pressure on both the supply and demand side in Q1, with businesses closed down and customers confined at home even due to a single case in their areas,” Derek Scissors, the chief economist at China Beige Book, said in January. “Omicron’s impact on services is the single biggest threat to the bullish economic case for next year.”

While some Chinese officials have spoken of a need to evolve the country’s approach, especially after the disastrous outbreak in Hong Kong showed the risks to a “COVID zero” system when the virus breaks through, Mr. Li said the country will stick to preventing inbound infections and domestic resurgence while continuing to improve its virus measures.

The country will cope with local COVID-19 outbreaks in a targeted and science-based manner to maintain the normal order of production and life, according to a government work report released ahead of Mr. Li’s speech.

China will also step up research into the prevention of coronavirus variants and accelerate researching and developing vaccines and effective medicines against COVID-19, the report said.

Mr. Li did not focus on the war in Ukraine in his speech. China has faced blowback from the West for appearing to support Moscow’s invasion, and there are already signs that the country’s economy is experiencing side effects of the disruption to logistics in Eastern Europe and the sanctions hitting Russia.

Writing this week, Andreea Brinza, vice-president of the Romanian Institute for the Study of the Asia-Pacific, said the “image of Chinese trains crossing Eurasia and bringing Chinese goods to European consumers has been intensely promoted by Beijing,” and had become an important part of Mr. Xi’s signature Belt and Road Initiative.

“But almost half of those routes pass through Russia-and could be massively impacted by European sanctions following Russia’s invasion of Ukraine,” she said.

Mr. Li touched on the issue of Taiwan in his speech. Some have seen parallels between the self-ruled island’s fate and that of Ukraine, with China similarly threatening invasion should Taipei pursue full independence from the mainland. Chinese officials reject such a comparison as it would acknowledge Taiwan is a country akin to Ukraine, rather than part of China as they insist.

“We will advance the peaceful growth of relations across the Taiwan Strait and the reunification of China,” Mr. Li said. “We firmly oppose any separatist activities seeking ‘Taiwan independence’ and firmly oppose foreign interference.”

Separately, a budget report released Saturday said China’s defence spending for this year will rise 7.1 per cent compared with 2021, on top of a 6.8-per-cent increase last year. Analysts have warned the military balance across the straits is rapidly shifting in Beijing’s favour, raising the possibility of a Chinese invasion in future.

With reports from Alexandra Li and Reuters

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