China’s ambitious GDP goal a boost to slowing world economy

China's ambitious GDP target could prove to be a modest boost for a beleaguered global economy that's grappling with stagflationary pressures from Russia's war in Ukraine. 

Beijing on Saturday announced a gross domestic product growth goal of "about 5.5%" for 2022, at the higher end of many economists' estimates. If achieved, that would be notably quicker than the 4.8% expansion forecast by the International Monetary Fund and the 5.2% seen by economists. 

Banks such as J.P. Morgan expect the fallout from Russia's invasion of Ukraine could shave around a percentage point from global growth this year. For the world economy, China growing 5.5% instead of 5% will add about 0.1 percentage points, according to Bloomberg Economics.

"Some modest additional stimulus this year would be welcome as the world is now facing increasing headwinds from Russia's invasion of Ukraine," said David Dollar, a former US Treasury representative in Beijing, now at the Brookings Institution. "China is trying to be careful not to create too much additional debt, so the world should not expect too much of a boost."

While Beijing is expected to stimulate by loosening controls on the housing market and increasing infrastructure investment, officials have also vowed to keep total debt levels in the economy stable this year. 

The target has added political meaning as President Xi Jinping is expected to make an unprecedented bid to stay on as leader for a third term at a key party congress later this year.

"They want some feeling of optimism and positivity going into the party congress, that they can overcome things," said Yukon Huang, a former World Bank country director for China now at the Carnegie Endowment for International Peace in Washington.

China's GDP grew 8.1% last year, partly due to the low base of comparison with 2020, when growth took a knock because of the coronavirus. Yang Weimin, a senior economic official, told state media the 2022 target was set relative to the average growth over the past two years of about 5.1%. It represents an acceleration from 4% growth seen in the final quarter of last year, and meeting the goal will require "effort on top of effort," he added.

While economists disagree about the extent to which Beijing is able to massage annual growth data, many believe that marginal adjustments are possible. If achieving the target turns out to be too much of a stretch, similar tactics could be used ahead of the party congress, meaning China's growth would have less global impact.

"What China publishes as a target and what they actually aim to achieve are two separate things," said Freya Beamish, head of macro research at TS Lombard. "The actual number will be published close to the target. But the reality could be significantly weaker."

China's economic links with Russia and Ukraine are a small part of its overall foreign trade and investment, so Beijing may calculate that it can largely insulate its economy from global instability, as it did during the global financial crisis and coronavirus pandemic.

"China has tended to capture larger shares of global trade when there are global problems," Huang said. "They may have been lulled into a feeling that the Ukraine situation won't hurt them."

Beijing has pledged to accelerate fiscal spending without increasing debt by using unspent funds from previous years and state-owned enterprise profits. The funding from such sources mean the stimulus will be relatively small-scale.

"The government's growth target is probably the upper edge of what China can reasonably achieve without large-scale stimulus," said Adam Wolfe, an economist at Absolute Strategy Research in London. "It's much more of a stretch target than last year's."

The government's annual work report didn't mention the "common prosperity" agenda aimed at reducing inequality, which some analysts have seen as a sign that sweeping regulation of technology companies last year will lighten in 2022. Due to the emphasis on growth, "regulation is not the top priority for policy makers," economists at Macquarie Group Ltd. said in a note.

As for monetary policy, the government kept its language largely unchanged while pledging to "step up implementation." Economists said that suggests more interest rate cuts may be coming, putting China's monetary policy trajectory in sharp contrast with the US and other developed nations, which are hiking or preparing to hike rates to curb high inflation. 

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.