To achieve its 'new leap forward,' China may need to employ a proven strategy.

• This year, Beijing set its annual growth target at approximately 5%, while maintaining a deficit-to-GDP ratio of 3%.
• Given the numerous challenges facing China's economy, including overcapacity, a real estate and debt crisis, it is likely that achieving the growth target will be challenging.
• Beijing may achieve its growth target this year if there is a project of similar size and quality to the Three Gorges Dam that can stimulate domestic demand, according to Wang Dan, an economist at Hang Seng Bank (China).

One economist warns that President Xi Jinping may need to use an old tactic to achieve China's ambitious growth target this year, despite the country's desire for a "new leap forward" in "productive forces."

Beijing's annual growth target for this year is "around 5%," as stated in the government's annual work report released on Tuesday. The deficit-to-gross domestic product ratio target for 2024 has been set at 3%, which is a decrease from the previous year's upward revision of 3.8%.

The Chinese government acknowledged that achieving this year's target will be challenging due to various issues affecting the world's second-largest economy, including overcapacity, declining price pressures, and a persistent real estate and debt crisis.

Hang Seng Bank's chief economist, Wang Dan, stated on Tuesday that the 5% GDP target is highly ambitious, despite China achieving 5.2% growth last year, mainly due to the rebound in consumption, which was the first year after Covid.

Unless there is a massive infrastructure project, China will struggle to achieve the 5% target this year as we will not be reopening again, she stated.

"The fiscal deficit is only 3% this year, and if the government achieves its target of 5% GDP growth, the fiscal expenditure as a percentage of the GDP will shrink."

The report suggests that Beijing is not implementing the aggressive stimulus that some observers expected.

Wang stated that the fiscal policy is mostly contractionary, and to boost domestic demand, there needs to be a project of similar size and quality to the Three Gorges Dam.

The Three Gorges Dam, a hydroelectric project on the Yangtze River, was initially approved in the early 1990s and became fully operational in 2015.

Historically, China has relied on infrastructure construction as a temporary solution to stimulate growth, especially following the 2008-09 financial crisis.

'Ultra-long' special bonds

Beijing plans to issue 1 trillion yuan ($138.9 billion) in "ultra-long" special treasury bonds in 2024 to finance major projects aligned with national strategies.

According to Erica Tan, economist at Maybank, these bonds have only been issued three times before: during the Asian Financial Crisis in 1998, for the capitalization of China Investment Corporation in 2007, and during the Covid-19 pandemic in 2020.

This year's government work report has provided a "most important positive surprise" in the form of a pledge, according to Goldman Sachs economists.

This year, 3.9 trillion yuan of special-purpose bonds for local governments will be issued, which is 100 billion yuan more than last year, as Premier Li Qiang announced.

Local government finances in China are closely tied to real estate troubles, as they have traditionally relied heavily on land sales to developers for revenue.

In 2020, Beijing's crackdown on developers' excessive debt usage for growth led to a slump in the property market, resulting in the bankruptcy of some major real estate companies and negatively impacting consumer confidence and overall economic growth.

According to Hang Seng Bank (China)'s Wang, the housing market is still in contraction and the possibility of a rebound is almost non-existent, leaving us with manufacturing and infrastructure as the only options.

The government's work report highlights infrastructure development as one of its key tasks for promoting integrated development between rural and urban areas.

'New leap forward'

Beijing's top priority is to modernize its industrial system and accelerate the development of new productive forces, highlighting the importance of strengthening its industrial capabilities as a long-term growth driver.

Premier Li emphasized the importance of innovation in driving industrial growth and increasing total factor productivity in his work report, which was translated into English.

The sentence can be rewritten as: "Some of the specific industries that are driving innovation include artificial intelligence, new-energy vehicles, hydrogen power, biomanufacturing, commercial spaceflight, new materials, and innovative drugs."

Maybank's Tan stated that the leadership's focus on industrial excellence means that resources will continue to be allocated towards expanding advanced manufacturing capabilities.

"The move to increase tariffs on Chinese imports is driven by a desire for economic security, but will be closely watched by countries concerned about export competition from cheaper Chinese products."