China has set its economic growth target for 2023 at “around 5%”, alongside a commitment to inject billions into its struggling economy, which is currently facing a trade conflict with the United States. This announcement came during the National People’s Congress, where thousands of delegates gathered to endorse decisions prearranged behind closed doors. The week-long event is closely monitored for insights into potential shifts in Beijing’s economic policies, making this year’s assembly particularly noteworthy.
President Xi Jinping is contending with stagnant consumer spending, a real estate crisis, and rising unemployment, exacerbated by new tariffs imposed by former President Donald Trump. The latest 10% tariff on Chinese imports, which took effect on Tuesday, follows an earlier 10% levy introduced in February, bringing the total US tariff to 20%. This escalation impacts a critical segment of the Chinese economy: its exports.
Retaliation and the Domestic Focus
In response to the new tariffs, China swiftly announced countermeasures, including imposing 10%-15% tariffs on select agricultural imports from the US, which is significant given that China is the leading market for a range of American agricultural products such as corn, wheat, and soybeans.
The opening of the Two Sessions meeting saw Chinese officials emphasize the need to make domestic demand the “main engine and anchor” of economic growth. While China successfully met its 5% growth targets over the past two years driven by robust exports, replicating this success is expected to be more challenging this year.
“If the tariffs linger, Chinese exports to the US could drop by a quarter to a third,” says Harry Murphy Cruise, head of China economics at Moody’s Analytics.
Given these circumstances, the Chinese government is increasingly relying on domestic spending to achieve its growth goals, a task that has proven difficult. On Wednesday, Premier Li Qiang addressed the sluggish consumption levels and pledged to “vigorously boost” household demand, acknowledging that the foundation for a sustained economic recovery “is not strong enough.”
Stimulus Measures and Future Prospects
Li pointed out that global economic shifts and a rising tide of protectionism are also influencing China’s economic environment. To stimulate domestic spending, Beijing has introduced various initiatives, such as allowing consumers to trade in and replace household goods including appliances and electronics.
To bolster these efforts, the government plans to issue 1.3 trillion yuan (approximately $179 billion) in special treasury bonds this year to fund its stimulus programs. Local governments will be permitted to increase their borrowing significantly, raising the borrowing limit to 4.4 trillion yuan from the previous 3.9 trillion yuan.
In a rare move, Beijing has elevated its fiscal deficit target to 4% of GDP, the highest in decades, signaling a commitment to enhance spending to support growth. Additionally, the government aims to create over 12 million urban jobs, setting an urban unemployment target of approximately 5.5% for 2025, up from 5.1% last year.
While there are plans to support high-tech industries and stabilize the property market, the primary question remains: Will these measures suffice to invigorate consumption? The lingering effects of pandemic-related restrictions, a drawn-out real estate crisis, and a crackdown on tech and finance sectors have fostered a sense of pessimism among the Chinese populace. The weak social safety net also underscores the importance of savings for unexpected expenses.
Nevertheless, Chinese leaders maintain a hopeful outlook. CPCC spokesman Liu Jieyi expressed that despite challenges like low demand, it is crucial to recognize that China’s economic fundamentals remain stable, highlighting the nation’s numerous strengths and substantial potential for recovery.
Investment in what President Xi defines as “high-quality development”—encompassing high-tech sectors from renewable energy to artificial intelligence—is projected to be a significant focus moving forward. As China aspires to establish itself as a global leader in technology, particularly to reduce its dependency on Western markets, recent success stories in tech innovation have drawn attention.
However, the newly imposed US tariffs may threaten these ambitions, as they could dampen investor sentiment. Murphy Cruise notes that the disruption caused by tariffs poses a significant challenge to investment in China, potentially undermining both exports and overall economic growth.
Additionally, China announced a 7.2% increase in its national defense budget, consistent with the growth rate from the previous year.