Editor's note: Xu Qiyuan is a guest researcher with China Finance 40 Forum, research fellow at the Institute of World Economics and Politics of the Chinese Academy of Social Sciences. The article reflects the author's opinions and not necessarily the views of CGTN.

The report on the work of the government set this year's GDP growth target at around 5 percent. On the one hand, since the beginning of 2023, after the pandemic basically ended, China's economic activities began to return to normal. Considering the low base effect of last year, China's economic growth rate in 2023 is relatively optimistic. From the perspective of local GDP growth targets at the beginning of this year, the GDP growth targets of 31 provinces, municipalities and autonomous regions ranged from 4 percent to 9.5 percent. Most of the targets ranged from 5 percent to 6.5 percent, with the majority being 6 percent.

On the other hand, looking at the external environment, some major economies will face the risk of recession in 2023 while the global economic growth rate is bound to be somewhat lower than in 2022. Meanwhile, the geopolitical situation remains uncertain. Therefore, China's growth target of about 5 percent is a relatively pragmatic goal. On this basis, adhering to the policy of "stability first, pursuing progress while maintaining stability," China has great hopes for achieving a growth rate significantly higher than 5 percent in 2023.

In terms of inflation, it was widely expected that inflation pressure would increase to a certain extent this year. That's while the target of "around a 3 percent rise in the consumer price index" set in the government work report remains unchanged from last year. Domestically, China's consumption will rise significantly. That will be the main force causing domestic inflation to likely remain at a certain level this year. However, from the perspective of foreign countries, the global growth rate will drop significantly. In terms of demand, overseas demand will weaken while on the supply side, commodity prices will also be lower than last year. These factors will help reduce the pressure of imported inflation in China. In general, the inflation target of about 3 percent can be achieved throughout 2023.

The government work report proposes to focus on expanding domestic demand, give priority to the recovery and expansion of consumption, and promote the stability and quality of imports and exports in terms of external demand. In 2023, China's economic recovery will show strong domestic demand and relatively weak external demand. On the one hand, foreign demand is not optimistic, and the pressure of stabilizing foreign trade may jump sharply. On the other hand, the performance of domestic demand is worthy of expectations with pent-up consumer demand likely to be released to some extent.

From the perspective of domestic demand, a rebound is to be expected. In normal years, the most stable sector of macroeconomic demand is consumption. In 2021 and the decade before, the average contribution of consumption to GDP growth was 4 percentage points, while in 2022 it was less than 1 percentage point. In other words, the GDP growth rate in 2022 was lower than expected largely due to weak consumption. Looking forward to 2023, consumer demand will be significantly improved and is expected to become the most important driving force for GDP growth.

When we look at the macro data in 2023, however, we should also pay attention to the perspective of two-year average growth. Looking at the growth rate in 2023 alone, including the consumption growth rate, the indicators will certainly perform quite strongly. For example, the WIND database consensus expectation for the growth rate in the second quarter has reached 7.7 percent. We should have a clear understanding about this growth rate and not assume that the economy is overheating or that we need to tighten policy just because the data is high. Even if the growth rate in the second quarter does reach 7.7 percent, the corresponding two-year average growth rate is about 4 percent, which may even be lower than China's long-term potential growth level.

It is necessary to pay special attention to the average growth rate over two years and observe whether the macroeconomic performance and consumer demand really returns to the original growth trend line. Before the average growth rate for two years returns to the desired level, we will continue to maintain policies to stabilize economic expansion, employment and income confidence. Moreover, these policies should be launched as soon as possible to reduce the negative impact of any scarring effect.