China’s slower growth expected as economy matures; increase in defence spending likely to continue: Analysts

China’s low economic growth target is in line with a global slowdown, and is a natural progression as the world’s second largest economy matures, analysts said on Monday (Mar 6), a day after Beijing set one of its lowest Gross Domestic Product (GDP) expectations in decades.

In an opening report at its 14th annual National People's Congress (NPC) on Sunday, the Chinese government said it is aiming for economic growth of around 5 per cent as it seeks to prioritise economic stability.

“Global inflation remains high, the foundation for stable growth domestically needs to be consolidated, and insufficient demand remains a pronounced problem,” said Chinese Premier Li Keqiang, warning of uncertainties in external factors.

IN LINE WITH GLOBAL MARKETS

The modest forecast was in line with a decline in the global economy, fuelled by Russia's invasion of Ukraine, soaring inflation, higher interest rates, reduced investments, and disruptions caused by the COVID-19 pandemic, observers said.

The World Trade Organization (WTO) has sharply revised the 2023 global trade growth forecast downwards to 1 per cent, from a previous projection of 3.4 per cent.

“This year, we are seeing a slowdown in the global economy – that is going to add pressure to the exporters in China,” said Mr Tommy Xie, OCBC Bank’s head of Greater China research, adding that this will likely cause net exports to drag on growth.
 

Mr Xie said rising geopolitical tensions, which “will continue to keep the pressure on the overall recovery of the Chinese growth” is another reason for China’s conservative outlook.

He cited an increasing number of mainland firms that have been added to the United States' “entity list” – a move by the US government which makes it difficult for these businesses to obtain US tech exports.

Following its dismal growth of 3 per cent last year – one of its weakest performances in decades and far below a projected 5.5 per cent – China is also likely playing it safe this year, preferring to set a lowered expectation that is easier to reach or even surpass, Mr Xie told CNA’s Asia First.

DOMESTIC DEMAND TO DRIVE RECOVERY

As China’s economy matures, growth will primarily be driven by consumers, said Mr David Kuo, co-founder of investment commentary firm The Smart Investor.

“While people are very worried about China’s slower growth rate, it is just a natural phenomenon. Its economy is going to be growing a lot more slowly, simply because it is maturing overall,” he said.

This means that firms focused on household spending, such as fast-moving consumer goods and insurance sectors are expected to see an increase in demand, he added.

“Looking at the Chinese government’s work report, domestic demand is at the top of China’s priority,” said Mr Xie, adding that automobile, smart technology and sustainability industries are expected to do well this year.

“Other than consumption, we expect China will continue to invest and to boost it overall infrastructure. These will become the key drivers to China's recovery this year.”

While the lower growth target has raised concerns of a further crackdown on private enterprise, Mr Xie said he expects the Chinese government to allow private sectors to play a bigger role, in order to provide new jobs for the more than 11.5 million university students expected to graduate this year.

“The private sector plays a very important role in job creation,” he said.

“One of the government’s targets this year is to increase urban job creation to 12 million. We expect China will allow the private sectors to play a bigger role for this.”

China has set a 5.5 per cent unemployment rate, and lowered inflation forecast for the year from 3 per cent to 2.5 per cent.

DEFENCE SPENDING LIKELY TO INCREASE

China’s military spending this year will outpace its economic growth, and analysts expect this trend to continue as it ramps up its defence capacities. 

“What the Chinese have long termed its ‘period of strategic opportunity’, meaning low prospect of international war and therefore a much higher priority on economic growth, is coming to an end,” said Mr Dean Cheng, senior advisor to the China programme at the US Institute of Peace.

“For a very long time, Chinese defence budget increases were less than the projected increase in the overall economy, (but recently) we have seen a flip,” he said.

He noted that the People's Liberation Army (PLA) is speeding up the modernisation of its forces and equipment. Apart from weapons, the nation is also buying and building military support systems and resources.

Additional budget can be expected to be spent on the PLA’s Rocket Force – which controls the country’s missiles, its space ambitions and cyber capabilities, as well as air and naval forces as “the Pacific is an air and maritime domain”, Mr Cheng said.

He added that this means there will likely be more Chinese military activities in the region.

“Not only are the Chinese likely to be more aggressive in terms of flights across the Taiwan Strait mid-line, but they will probably be more aggressive when it comes to intelligence collection as well,” he said.

China on Sunday announced an increase in its defence spending by 7.2 per cent with an allocation of 1.55 trillion yuan (US$224 billion), while warning of "escalating" threats from abroad.