[Preview of China's Two Sessions] Economic Imbalance Deepens... V-Shaped Recovery 'Unlikely'

This Year's Growth Rate Expected in the 5% Range, to be Announced at the National People's Congress Opening
Rapid Recovery in Consumption Such as Dining Out and Services
Real Estate and Durable Goods Show Weak Trends

China's economic recovery policies to be announced through the Two Sessions (National People's Congress and Chinese People's Political Consultative Conference) have been met with skepticism even before their release. There is a prevailing view that the policies, carefully crafted by President Xi Jinping's third-term leadership, will struggle to drive a V-shaped rebound in the Chinese economy. The main reason cited is the uneven economic recovery, where sectors like real estate and durable goods consumption remain sluggish, while some areas such as services show rapid recovery.

◆Economic Growth Target in the 5% Range... Conservative Outlook= According to major foreign media including Bloomberg and CNBC on the 3rd, Premier Li Keqiang, who ranks second in the current power hierarchy, is expected to present an economic growth target in the 5% range during the government work report at the opening of the National People's Congress (NPC) on the 5th. Considering that last year's growth rate was only 3%, significantly below the initial target of 5.5%, this represents a somewhat conservative approach.

A Bloomberg survey of 24 experts found that only one respondent predicted growth above 6% this year, with most forecasting growth in the 5% range. Among major investment banks (IBs), the most optimistic global institution is Soci?t? G?n?rale, projecting around 5.8%. Conversely, BNP Paribas and Oxford Economics forecast growth rates of 4.5%. Louis Luo, Chief Economist at Oxford Economics, said, "Given the significant increase in public investment last year, the reopening effect may not be as large as expected."

The biggest factor behind the conservative outlook is the uneven recovery of the Chinese economy. Since the abrupt shift to a 'With COVID' policy at the end of last year, China's real economy centered on dining out, services, and travel has been recovering rapidly, whereas the real estate and durable goods sectors continue to struggle. According to the China Association of Automobile Manufacturers, passenger car sales in China from January 1 to February 19 this year fell 26% compared to the same period last year. Real estate prices have also been declining since early last year. Transaction areas have shown little sign of recovery. According to Chinese economic media Caixin, last year China's housing transaction value and transaction area were 13.3 trillion yuan (approximately 2,518.887 trillion KRW) and 1.36 billion square meters, respectively, down 27% and 24% from the previous year, returning to 2015 levels.

On the other hand, the official manufacturing Purchasing Managers' Index (PMI) for February stood at 52.6, the highest in 10 years and 11 months since April 2012 (53.3). Particularly, the PMI for the service sector was 56.3 last month, well above the baseline of 50, indicating a strong recovery.

◆Income Distribution Imbalance Also a Hindrance= There are also concerns that the surge in savings in China is being channeled more into tourism and dining rather than real estate or durable goods consumption. According to the People's Bank of China, yuan deposits increased by 6.59 trillion yuan last year to 26.26 trillion yuan. Dong Ximiao, Chief Researcher at Zhao Lian Finance, analyzed this as "a result of a combination of phased causes such as the COVID-19 shock and deep-rooted causes like income distribution imbalance," adding, "To translate this into consumption, the income distribution imbalance phase must be reversed and the income levels of the middle and low-income groups effectively raised."

The increased fiscal deficit over the past three years, spent to curb the spread of COVID-19, also supports the view that China's stimulus measures will be difficult to implement normally. Last year, China's fiscal deficit reached a record high of 8.96 trillion yuan. Local governments' debts have surged sharply, often causing delays in paying civil servant salaries and electricity bills.

The ongoing US-China tensions and global economic slowdown have also created an environment where exports, a pillar of the Chinese economy, struggle. In December last year, export value fell 9.9% compared to the previous year, marking the largest drop since March 2020 (-17.20%).