China has set its lowest official target for economic growth in three decades.

Speaking during one of China’s most important political gatherings of the year, Premier Li Keqiang said that China would target GDP growth of about 5.5% this year. The world’s second biggest economy grew 8.1% in 2021, but the pace of expansion slowed sharply in the final months of the year.

Chinese policymakers face mounting challenges to keep growth steady, as the country contends with a real estate crisis and Beijing’s zero-tolerance approach to the coronavirus. The fallout from the Ukraine crisis could also slow growth by driving commodity prices higher.

“A comprehensive analysis of evolving dynamics at home and abroad indicates that this year, the risks and challenges for development rise significantly, and we must keep pushing to overcome them,” Li said.

China would ensure food and energy security and step up oil exploration and development, Li added. Beijing would spend more on defense, while aiming for a smaller budget deficit of 2.8%.

This year’s “Two Sessions” meeting kicked off Friday with a gathering of top political advisers to the Communist Party. On Saturday, the National People’s Congress — the country’s rubber-stamp parliament — convened.

Top of the agenda is how to maintain stability, as President Xi Jinping looks to secure a third term in power during the twice-in-a-decade leadership reshuffle later this year.

China is facing a “challenging backdrop,” said Iris Pang, chief economist for Greater China at ING, in a research report on Thursday.

“The country is still under a zero-Covid policy and consumption has been weak, while policy implications on the real estate and technology sectors linger on,” she said.

“Outside China, geopolitical tensions are high while supply chain disruption and semiconductor shortages continue,” Pang added.

Russia’s invasion of Ukraine has pushed up global commodity prices, with oil and wheat futures hitting the highest in more than a decade. Investors fear the war in Ukraine and sanctions on Russia could upend critical supply chains, given Russia’s status as a top supplier of commodities. Ukraine is also a major exporter of wheat as well as neon, a gas used in making computer chips.

Pivot from zero-Covid?

The political gathering was also being watched for any sign that Beijing is preparing to relax its Covid curbs. Premier Li said Saturday that Covid controls would continue to prevent inbound cases and tackle domestic outbreaks, but China would also step up its study of the virus and accelerate the research and development of vaccines and medicines.

The country is the only major country still trying to implement a zero-Covid strategy, which involves mass mandatory testing, strict lockdowns, and border controls. While the rest of the world is reopening and learning to live with COVID-19, China’s approach has weighed on its post-pandemic recovery and global supply chains.

Consumer spending, for example, has dramatically weakened amid Covid-related disruptions, such as the outbreaks in Zhejiang and Xi’an in recent months that caused authorities to shut down factories and put thousands of people in quarantine. Tourist spending over the Lunar New Year holiday was 44% lower than in 2019. In December, retail sales increased just 1.7% from a year earlier.

There are already hints that Beijing may have started thinking about relaxing its Covid grip.

Zeng Guang, a former chief epidemiologist of the Chinese Center for Disease Control and Prevention, wrote on his Weibo account this week that China could move away from its zero Covid policy in the near future. He has participated in formulating China’s initial Covid policies.

“In the near future, at the right time, the roadmap for Chinese-style co-existence with the virus should be presented,” he wrote.

“It’s an early but important signal that Beijing started thinking about the prospect of living with Covid,” said Larry Hu, chief Greater China economist for Macquarie Group, in a research note on Wednesday. “More open discussions will come in the coming months.”

Gradual reopening

Other analysts expect China’s reopening to be gradual and cautious, when it comes.

“While the government is exploring ways to reopen, it is likely to move cautiously ahead of the 20th Party Congress in October or November,” analysts from Goldman Sachs said in a note on Thursday, commenting on news reports about China’s potential pivot from zero-Covid policy.

They pointed to hurdles to a complete reopening, such as the recent surge in Covid cases in Hong Kong and pressure on local hospitals.

The Hong Kong situation is a “reminder of the challenges associated with a potential reopening,” they added.

Guo Weimin, a spokesperson for the country’s top political advisory body, defended China’s Covid controls on Thursday as “relatively low-cost and effective.”

Speaking at a press conference ahead of the Two Sessions, Guo said the new waves of the pandemic in some developed countries had seen a large number of severe cases and fatalities, while their health care systems had been overwhelmed.

“If China didn’t take those effective measures, the outcome would be unimaginable for a developing country of more than 1.4 billion people,” he said.

— CNN’s Beijing bureau contributed to this article.

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