China has published annual real GDP growth of 3% for 2022, far short of its official target of 5.5%, surprising markets with the extent of the damage wrought by draconian zero-Covid measures. The disclosure is refreshing for a country notorious for massaging its official headline growth figures. The economy was likely even weaker, in reality, but by appearing more honest China aims to instil confidence, both at home and abroad. 

By revealing one of the weakest annual performances in decades Beijing has also signalled its determination to bring the economy back to its feet. 

Real GDP was flat in Q4 and averaged just 2.8% in quarterly annualised terms last year. This compares with 5.5% in 2019 and an average of 6.2% in 2017-19. 

But what rate of expansion can China hope to achieve in coming years? 

Beijing has opted for a sizable fiscal and monetary boost, as it emerges at last from its economically-bruising zero-Covid strategy. That is likely to result in growth rates that come close to pre-pandemic levels, at least in the short term. 

Enodo Economics estimates that in the first quarter, local governments plan to raise over 30% more funds through special purpose bonds (SPB), used for infrastructure and other capital spending, than they did during the same period last year. 

Chinese officials are considering a record quota for overall SPBs this year, a quota which will be revealed at the National People's Congress in March. But Beijing has already allowed local governments to front-load part of their quota with bond issues starting at the beginning of this year. The national figure has not been disclosed.

Provinces and special administrative regions accounting for 45% of national output plan to raise 32% more via SPBs in Q1 2023 than in Q1 2022, Enodo calculations show. 

China's overall debt burden has reached dangerous proportions, but government debt as a share of GDP is still comparatively low. Local government finances are in dire straits as revenue from land sales has plummeted and businesses got tax breaks to help them cope with the pandemic, while local government spending on Covid testing and controls rose.

Over the long term China needs to overhaul its national and local tax and spending regime. But for this year we expect the central government to issue more debt, including potentially using Special Treasury Bonds (which have the advantage of being off the balance sheet) as well as directing policy banks to grant more loans for infrastructure projects.

China's Public Private Partnerships (PPPs)

Source: Enodo Economics, MoF, media reports

Since 2017, China has promoted public private partnerships (PPPs) to fund infrastructure and public works, thus reducing local government debts and creating new opportunities for private capital. Last year, the government rolled out a series of favorable measures to encourage PPP projects in areas including water conservancy, environmental protection, logistics and technological innovation.

Initially, private firms were reluctant to take up PPP projects. In 2017 only 38% of the projects on offer were implemented. 

Enodo's investigations reveal that the PPP take-up rate has grown steadily, reaching 82% in Q3 2022. 

The effectiveness of the fiscal stimulus will depend on how it is financed. If the government borrows from banks or foreigners it will boost broad money growth, creating a lengthier cyclical recovery. If non-banks are the main buyers the effect on broad money is neutral. 

Beijing has pledged 'prudent' monetary policy with targeted support for 2023, but the authorities had already opened the monetary taps over the course of last year. 

Broad money growth has picked up speed and at 11% in the year to December it points to a decent cyclical recovery. 

We expect broad money growth, which is the best indicator for overall monetary conditions, to stay in double-digits this year as the authorities ensure ample liquidity to buttress the recovery. 

Conclusion

Overall, the 2022 GDP numbers support Enodo Economics' analysis that the restrictions and distortions of the zero-Covid policy carried a serious economic bite. Beijing has signaled that it will try to put the economy back on track as soon as possible, once its current policy of allowing the disease to spread unchecked has run its course.

What then? Over the past couple of years we have warned repeatedly of China's growing debt burden. The reliance on additional SPBs to revive the economy this spring shows that Beijing has fallen back on an old playbook: Stimulus now, worry later. 

But this is not a recipe for placing the economy on a sustainable growth path, especially in the context of significant global headwinds. Next up, we will discuss why China's consumer spending is likely to disappoint.