In brief

• Chinese NPC annual session will start on March 5. Key outcomes are the nomination of the new government economic team and setting of policy priorities.
• Annual growth target might be set at a lower, but more flexible “around 5%” value. Monetary and fiscal policies are likely to remain accommodative, prioritizing support to credit and investment growth.
• Longer and stronger stimulus are essential to boost investor confidence. 

The Chinese People’s Political Consultative Conference (CPPCC) and the National People’s Congress (NPC), or the "two sessions", will start their annual sessions respectively on March 4 and 5. As the first annual NPC session after the leadership transition in October last year, the two sessions may last up to 12 days. Key outcomes will include nomination of the new government economic team and setting of policy priorities.

Personnel reshuffling

On top of the agenda will be the appointment of a new State Council and key ministry chiefs for the next five years. If there are no surprises, former Shanghai Party Secretary Li Qiang will be appointed as the Premier, together with four new vice premiers. There will also be a reshuffling of key economic officials including heads of National Development and Reform Commission, Ministry of Finance, People’s Bank of China, and financial regulatory agencies.

Meanwhile, there will be a restructuring of central government organizations according to recent official announcement. Although the details are still to come, the goal for such reform creates a more centralized power structure for policy making and execution. Policy coordination might be enhanced through further integration of financial regulators. The purpose of this restructuring may be to facilitate the allocation of resources towards long-term policy initiatives aimed at restructuring the domestic economy and increasing self-sufficiency in key technological supply chains.  

Growth target and policy priorities

On the policy front, policy targets for 2023 will be announced in the Government Work Report presented by incumbent Premier Li Keqiang on March 5. At the end of the session, new Premier Li Qiang will host a press conference to further articulate the new economic team’s policy plan for the next five years.

China reported 3% year-over-year real growth of annual GDP in 2022, which is 2.5 percentage points below the target. The growth rate is very likely to rebound in 2023 from such a low base. Local governments have already published their respective growth targets, reflecting cautious optimism for this year.

Out of the 31 provinces, 20 have set targets at 6% or higher, while only two have targets below 5%. Since the national target is usually more conservative than local numbers,  we expect a national growth target of “above 5%” to be set for 2023.

The 5% target seems moderate in comparison with consensus expectation for stronger growth of around 5.5% in 2023. However, this still signals a pro-growth policy stance for this year, while leaving some flexibility in the face of uncertainties in global economy and geopolitics.

To achieve the growth target, monetary and fiscal policies are likely to remain accommodative in 2023. The target for M2 growth might be reiterated as “being in line with nominal GDP growth”, with structural and targeted credit policies to maintain stable liquidity condition. In order to stabilize the property market with long-term credit, one or two 15bps cuts to five-year loan prime rate are still possible.

Expansionary fiscal policy will likely continue in limited manner given the rise in government debt in the past three years. We expect the budget deficit target to be raised slightly to 3% of GDP (2.8% in 2022). To stabilize local governments’ infrastructure investment, the quota for special local government bonds might also be raised slightly to around RMB 4trillion (RMB 3.65trillion in 2022). Tax reduction and consumer subsidies might be continued to support specific sectors such as automobile, while the aggregate scale could be smaller than in 2022.

In line with this cautiously optimistic growth and policy targets, the inflation target might remain at 3%, signaling the tendency to avoid flooding the market with excess liquidity.

Beyond the short-term priorities, the new economic team is expected to mobilize more resources into key long-term initiatives. High quality growth will be reiterated as the major theme for the next decade, implying continuous investment into semiconductor industry, renewable energy, biotech, etc. Particular emphasis will be placed on the self-sufficiency and security of the technology supply chain given the backdrop of escalating geopolitical tension.

Exhibit 1: MSCI China earnings growth estimates*
Earnings per share, year-over-year change, consensus estimates

Source: FactSet, MSCI, J.P. Morgan Asset Management. Tech refers to Technology; Cons. Staples refers Consumer Staples; Comm. Services refers to Communication Services; Cons. Discr. refers to Consumer Discretionary. *Sector indices used are from the MSCI China Index. Consensus estimates used are calendar year estimates from FactSet. Past performance is not a reliable indicator of current and future results.
Guide to the Markets – Asia. Data reflect most recently available as of 28/02/23.

Investment implications

Driven by the expectation for economic recovery and monetary easing, Chinese stocks have rallied in recent months. To the end of January, the CSI300 index rose  20% from the November low, and MSCI China index surged over 50%. As major beneficiaries from reopening, leading consumer names were the best performers.

That said, investor sentiment has yet to pick up significantly, as evidenced by sluggish February performance. Weaknesses in property market and private business confidence are major concerns, making many individual investors remain cautious about the sustainability of  consumption recovery while the other sectors are still under pressure.

To boost market confidence, stimulus policies should stay in place for longer time, and stronger measures might be necessary. The NPC session will deliver further messages on this aspect.

Despite recent volatility, we remain constructive on Chinese stocks. The growth outlook for most sectors remains strong (Exhibit 1), and there is upside potential when policy stimulus escalates. Long-term themes, such as self-sufficiency of technologies, green development and consumption upgrade, might outperform given the sustained growth in domestic demand and policy tailwinds. 

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