How will China achieve its 5% growth target?

China has a formidable reputation for meeting its economic growth targets. In each of the past two years, despite challenges, the 5 per cent GDP target has been achieved. This year’s has also been set at around 5 per cent. But where will the growth come from?

China’s economy certainly has the potential to grow faster. The economic fundamentals have improved: the property market looks to be either near its bottom or already bottoming out. Households savings have risen so much that personal bank deposits now exceed GDP.

And the stock market is coming out of bear territory. The Hang Seng Index is up by over 21 per cent this year, on top of a 17.7 per cent increase last year. In particular, the Hang Seng China Enterprises Index, which rose 26.4 per cent last year, has gained a further 22 per cent this year, significantly outperforming major stock indices worldwide. The Shanghai and Shenzhen stock markets, which rose by 13 per cent and 12 per cent respectively last year, have also made modest gains this year.

That the Hong Kong market has done better than its Shanghai counterpart suggests foreign investors are more bullish about China’s economic outlook than domestic investors. Rebuilding domestic confidence is critical. China only achieved its GDP target last year thanks to unusually high exports.

Consumption contributed to just 44.5 per cent of China’s GDP growth last year, down from 82.5 per cent in 2023, while the share from capital formation, a marker of investment, dropped to 25.2 per cent from 28.9 per cent. It was the strong recovery in exports that made the difference: net exports contributed to 30.3 per cent of GDP growth, from minus 11.4 per cent in 2023.

In particular, private consumption was lacklustre, growing by over 5 per cent while retail sales rose by just 3.5 per cent over the year. This is not because households didn’t have the money – they were merely unwilling to spend it.