China sets high growth target

Chinese Premier Li Qiang announced this week that China is aiming for GDP growth of around 5 percent this year. Though the same as 2023, this target is more ambitious because the country can no longer take advantage of the low base caused by 2022’s pandemic lockdowns.

The target is also higher than the International Monetary Fund and World Bank’s estimates for Chinese growth this year. Many investors are wondering whether this is a signal that the government will unleash more stimulus in the months ahead.

As it stands, China still seems reluctant to use excessive government borrowing for massive stimulus measures. This year’s budget deficit target (3 percent of GDP) is lower than last year’s figure of 3.8 percent and generally deemed insufficient to reflate the economy.

Nevertheless, Premier Li did unveil a few policy support measures and we think there is scope for more to be announced later in the year. Here is what to expect:

1. Limited fiscal stimulus

   There are plans in place to issue 1 trillion yuan (US$139 billion) in ultra-long special sovereign bonds which will be used to fund key government projects and support business activity.

   Additionally, local governments will be allowed to issue 3.9 trillion yuan (US$542 billion) of new special bonds to finance infrastructure spending this year. This is higher than 2023’s quota of 3.8 trillion yuan.

   We also anticipate a higher quota of Pledged Supplemental Lending (PSL) funds. These are directed at housing and infrastructure projects and could help ensure China’s 5 percent growth target is met.

2. Continued focus on technological self-reliance

   In line with President Xi Jinping’s push for “new productive forces” to drive China’s new economy, the government has pledged to provide more resources to support innovation and technology.

   Key focus industries include electric vehicles (EV), new hydrogen energy, new materials and innovative pharmaceuticals. Bio-manufacturing and commercial aircraft manufacturing have also been designated as new growth engines for China’s economy.

   Meanwhile, efforts to boost China’s technological self-reliance, especially in the areas of artificial intelligence (AI) and big data, will continue to be prioritised.

3. More support for housing and consumer demand

   On the property front, the Chinese government pledged to defuse property risks and provide more support for the housing market.

   The Chinese authorities are also planning to launch a yearlong program to boost domestic consumption in a bid to steer the economy away from a property-driven growth model. Although no concrete policies have been announced, we think policy support for big-ticket consumption could be unveiled at a later date, including a trade-in for consumer goods, something the Chinese government called for last month.

Recent market rally may not be sustainable

After lagging global peers in 2023, Chinese equities have rebounded in recent weeks, buoyed by policy measures such as state-funded stock purchases and wider trading restrictions on quantitative hedge funds. As a result, the country’s benchmark CSI 300 index has gained 10.3 percent since February.

However, it remains to be seen whether the rally can be sustained. Investors are awaiting follow-up actions from the authorities, and a failure to meet expectations or lack of policy details could trigger profit-taking.

A longer-term rerating of Chinese stocks will likely hinge on signs of a turnaround within the beleaguered property sector. Falling property prices and declining sales - January saw sales drop by 38 percent year-on-year - weigh heavily on the broader economy given that real estate makes up around 70 percent of gross household wealth in China.

Support for property developers is crucial

There is a need therefore for the Chinese government to pledge strong support for property developers, such as by acting as the lender of last resort. Doing so would allow the property sector to recover, which will then stabilise the job market and restore consumer confidence.

In the absence of such measures, positive economic data and policy support announcements could give rise to rallies, but we expect these to be short-lived. We think markets will remain volatile for as long as property remains a drag on sentiment.

That said, we think tactical opportunities can still be found in particular stocks and sectors. Stock selection is key and we see opportunities in areas like AI, tourism and companies that are expanding overseas.

If you are interested in investment opportunities related to the theme covered in this article, here is a UOB Asset Management Fund to consider: United Greater China Fund Website Fund Commentary You may wish to seek advice from a financial adviser before making a commitment to invest in the above fund, and in the event that you choose not to do so, you should consider carefully whether the fund is suitable for you.