China will target economic growth of around 5% this year, Premier Li Qiang said on Tuesday, promising steps to transform the country's development model, curb industrial overcapacity and tackle risks in the property sector and municipal debt.

Delivering his maiden work report at the annual meeting of the National People’s Congress, China’s rubber-stamp parliament, Li also flagged higher defence spending, while hardening the rhetoric on Taiwan.

A sputtering post-Covid recovery in the past year has laid bare China’s deep structural imbalances, from weak household consumption to increasingly lower returns on investment, prompting calls for a new growth model.

China started the year with a stock market rout and deflation at levels unseen since the global financial crisis of 2008-09. The property crisis and local government debt woes persisted, increasing pressure on China's leaders to respond to these calls.

“Policymakers seem happy with the current trajectory,” said Ben Bennett, Asia-Pacific investment strategist at Legal And General Investment Management, adding the economic targets were “as expected”.

“That’s disappointing for those that hoped for a bigger push... There’s rhetorical support for local government debt and the property sector, but the key is how this is applied in practice.”

With awe at China’s economic miracle fading rapidly, some economists drew comparisons with Japan’s lost decades of stagnation in the 1990s, calling for pro-market reforms and measures to boost consumer incomes.

“We should not lose sight of worst-case scenarios and should be well prepared for all risks and challenges,” Li said in the Great Hall of the People in Tiananmen Square.

“In particular, we must push ahead with transforming the growth model, making structural adjustments, improving quality, and enhancing performance.”

There were no immediate details on the structural changes China intended to implement, however, with Li also emphasising stability as “the basis for everything we do”.

Li announced a growth target similar to last year’s, saying achieving it “will not be easy”. Beijing intended to have a “proactive” fiscal stance and “prudent” monetary policy, he added.

The target takes into account “the need to boost employment and incomes and prevent and defuse risks,” Li said.

Chinese stocks and the yuan were largely unchanged.

China plans to run a budget deficit of 3% of economic output, down from a revised 3.8% last year. Crucially, it plans to issue 1 trillion yuan ($139 billion) in special ultra-long term treasury bonds, which are not included in the budget.

The special bond issuance quota for local governments was set at 3.9 trillion yuan, versus 3.8 trillion yuan in 2023. China also set the consumer inflation target at 3% and aims to create over 12 million urban jobs this year, keeping the jobless rate at around 5.5%.

“China is unlikely to do big bazooka-style stimulus,” said Tommy Xie, head of Greater China research at OCBC Bank. “There are still a lot of constraints at the moment in terms of how China can support the economy via fiscal expenditure.”

Budgetary plans included an increase in defence spending by 7.2% this year, similar to 2023 - a figure closely watched by the U.S. and China's neighbours, who are wary about its strategic intentions as tensions rise over Taiwan.

Chin’'s defence budget has doubled since President Xi Jinping came to power more than a decade ago. This year marks the 30th in a row of increasing defence expenditure, based on research by the International Institute for Strategic Studies.

Li’s report dropped previous mentions of “peaceful reunification” with Taiwan. Officials vowed to “resolutely oppose separatist activities aimed at 'Taiwan independence’ and external interference”.

Analysts expect China to lower its annual growth ambitions in the future. The International Monetary Fund projects China’s economic growth at 4.6% this year, declining further in the medium term to about 3.5% in 2028.

Faced with a demographic crisis that also threatens the switch to a consumer-led growth model, China’s state planner vowed to improve policies supporting childbirth, while raising benefits and basic pensions for its growing elderly population.

At the same time, China will continue to pour resources into tech innovation and advanced manufacturing, in line with Xi’s push for “new productive forces,” Li said.

It will lift all foreign investment restrictions in the manufacturing sector and relax market access in some service industries.

Beijing will also formulate development plans for emerging industries, including quantum computing, big data and artificial intelligence as it strives for technological self-sufficiency.

Some analysts have criticised China’s policy focus on high-tech manufacturing, saying it exacerbates industrial overcapacity, deepens deflation and heightens trade tensions with the West.

“The pursuit of speed has given way to the change in the model of growth,” said Hu Yuexiao, chief economist at Shanghai Securities.