China’s leadership will gather this weekend for the start of annual meetings against a backdrop of solid economic performance. However, the latest data from FT Confidential Research highlight risks that will test the government’s appetite for slower growth. 

The meetings of the Chinese People’s Political Consultative Conference and National People’s Congress, known as the “two sessions”, officially start on March 3, with Premier Li Keqiang expected on March 5 to announce an annual growth target of about 6.5 per cent. This would match last year’s goal — and compare with actual growth of 6.9 per cent — but perhaps without the previous qualifier of trying to grow faster “if possible in practice”. 

Growth is widely expected to slow this year, although our surveys of 1,000 households and nearly 1,000 businesses suggest the economy has been reasonably stable in its opening months (distortions created by the lunar new year mean official growth numbers for January and February combined will not be available until mid-March.) 

Steady as she goes

The FTCR Freight Index improved in February, with companies reporting a pick-up in volumes and rates. More than 40 per cent of respondents again cited increasing customers or goods as factors behind changes to their business, back to the levels of four years ago. These results track China’s manufacturing purchasing managers’ indices, which have shown similar recoveries since the turmoil of 2015 and 2016.

Our export index was slightly below last February’s level, but this is in part down to the timing of the lunar new year holiday this year. The holiday also had a negative impact on our Labour Market Index, which measures the appetite for hiring among 285 companies across the manufacturing, service and construction sectors. A seasonal slowdown in the latter was enough to drag our headline index 3.1 points lower, even though service sector demand was largely unchanged and demand from manufacturers increased versus January. 

The seasonal lull in the housing market weighed on the FTCR Real Estate Index but prices rose again across all city tiers. Our Business Activity Index, which aggregates the results of our freight, export and real estate surveys, was nearly flat in February, held down by the quiet period for housing sales, as well as the softer results from exporters.

Although activity typically picks up after the holiday, the outlook for this year is clouded by the leadership’s professed determination to rein in the financial system. Our forward-looking indicators suggested that businesses and households are more cautious about the post-holiday outlook than in recent years. 

Shifting political landscape

Major changes in China’s policy landscape raise the possibility of more aggressive moves to tackle sources of debt in the economy. The NPC is set to vote to scrap the two-term limit on the Chinese presidency, recommended by the Communist Party Central Committee last weekend, clearing the way for Xi Jinping to stay in office beyond 2022, when his second term ends. 

The government is also reportedly considering appointing Liu He, Mr Xi’s chief economic adviser, to a vice-premiership and perhaps a concurrent governorship of the People’s Bank of China, replacing Zhou Xiaochuan, who will retire after more than 15 years. Mr Liu is thought to be the author of the May 2016 opinion piece in the People’s Daily that excoriated the bureaucracy’s addiction to growth at all costs and its willingness to open the credit taps — “trees cannot grow to the sky”, the author wrote.

Unencumbered by the constraints of succession politics, and with his hawkish adviser in place to direct economic and monetary policy, Mr Xi theoretically has the power to push through debt-reduction measures that vested interests — including those targeted by the People’s Daily piece — have previously obstructed. 

This implies slower growth ahead and a knock-on effect on Chinese consumer sentiment, though it still remains to be seen how politically constrained the leadership will be by its annual growth target.

Consumer sentiment is vulnerable to these shifting policy winds. Our latest survey shows that urban households across all city tiers have done well from rising asset prices while the recent stock market sell-off was a reminder of their susceptibility to market downturns. 

The FTCR China Business Activity Index is a composite reading of business activity and sentiment based on our surveys of companies in the real estate, export and freight sectors. For individual survey methodologies click here. A full set of survey results can be found in our database.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and south-east Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.