Beijing is likely to set its annual growth target within a range for 2016, something it has done only once before, in 1995, reflecting the indecisiveness of policymakers over a question
Premier Li Keqiang is expected to set a GDP growth target of 6.5 per cent to 7 per cent when the country’s lawmakers gather later this week for the National People’s Congress.
Usually, China prefaces its growth targets with the word “about”. It had a target of “about 7 per cent” in 2015 and “about 7.5 per cent” in 2014.
On Wednesday ratings agency Moody’s downgraded its outlook on the government bond rating from “stable” to “negative”.
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Setting a range instead offers more leeway for Li’s government to manoeuvre economic policies and make it easier for Beijing to declare victory in meeting targets.
It also reflects a certain level of indecisiveness from the leadership on how to handle conflicting goals – whether it should bravely honour its promises of structural reform, or surrender to pressure to address the slowdown in growth by easing monetary policy and boosting fiscal spending.
An unprecedented amount of bank credit in January, an unexpected cut in the central bank’s required reserve ratio announced on Monday, and dovish comments from central bank governor Zhou Xiaochuan at the G20 meeting in Shanghai last week all suggest that Beijing, at least for now, is putting its ambitious reform plan on the back burner to focus on arresting the slowdown.
Li told the US Treasury Secretary Jacob Lew on Monday China would “forcefully push forward” structural reforms, especially on the “supply-side”, reiterating his longstanding view that stimulus is not the right move for China’s economic future.
“Policy messages have been really confusing in recent months,” said Li Weisen, an economics professor with Fudan University in Shanghai, who attended symposiums with Chinese policymakers last week. “There are some voices advocating policy easing, and there are equally important voices saying ‘no policy easing please’.”
Christopher Balding, an associate professor at the HSBC Business School of Peking University in Shenzhen, said Beijing’s problem was it failed to see and accept “that economics is about trade-offs”.
“Yes, you can continue to expand credit rapidly but that will have trade-off costs like higher financial risks and poor capital allocation towards the state sector. Yes, you can deleverage but that is going to lower short term growth,” said Balding.
The trade-off between economic rebalancing and growth will always be a challenge.
While China’s economic officials were doing their best to support growth, they faced constraints, said Tim Condon, head of Asian research at ING in Singapore.
“They want to phase out inefficient capacity, they don’t want to ruin the environment – those are drags on growth,” Condon said.
“The jury was out” on how far Beijing would pursue policy easing, and it was too early to conclude that it was returning to the playbook of 2009 when it pursued growth at the cost of forgetting structural reforms, said Condon.
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At least in some areas, Beijing has shown a willingness to take some pain.
Labour Minister Yin Weimin said on Monday China was ready to make 1.8 million workers redundant at coal mines and steel mills. Total layoffs caused by China’s clampdown on overcapacity and polluting sectors could be up to six million in the next two or three years, Reuters reported.
Using a range as a target for growth could be misleading, said Zhu Baoliang, a researcher at the State Information Centre, a think-tank affiliated with China’s planning agency.
“If the headline growth is targeted in a range, should other indicators such as money supply and employment be targeted in a range as well? Or should all local governments follow suit to set their growth targets in ranges?” Zhu said last month.
A few well-informed provincial governors have already done so.
Among them, Li Qiang, the governor of eastern Zhejiang province, set a provincial growth range of 7-7.5 per cent, while Guo Shuqing, the Shandong provincial governor, targeted growth of 7.5-8 per cent for 2016.
“A range target from the central government can actually reduce growth pressure on local governments – if the growth target is 7 per cent, basically every province is trying to achieve growth higher than that,” said Frank Tang, an economist with North Square Blue Oak, a China-focused research and investment firm.
“Now the message has changed – it’s okay as long as growth is not below 6.5 per cent.”
Wen Bin, the chief economist with China Minsheng Banking Corp in Beijing said the key message in the range was its lower end of 6.5 per cent.
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He said China had “made it clear there’s a bottom” as it needed a minimum growth rate to achieve its strategic goal of doubling the economy by 2020 – the year before the 100th anniversary of the Chinese Communist Party.
Premier Li has been trying different methods to recharge the economy, from urbanisation pushes to backing internet-based entrepreneurship, but his disdain for massive stimulus has been consistent over the past three years.
As recently as December 2015, Li wrote in The Economist that “my government has resisted the temptations of quantitative easing and competitive currency devaluation. Instead, we choose structural reform”.
By setting a target range, China would not be shy to flex its monetary and fiscal muscle to avoid an economic hard-landing when it sees a danger of growth sliding below 6.5 per cent, said Ding Shuang, the chief China economist with Standard Chartered in Hong Kong.
“On the other hand, the upper limit of 7 per cent also shows that Beijing is reluctant to adopt an all-out stimulus – it’s unnecessary to push growth to a level exceeding 7 per cent.”
While the annual GDP target is politically important and seen as an indication of Beijing’s policy intentions, using it to predict actual growth has its limitations.
In 1995, then premier Li Peng set a GDP growth range of 8-9 per cent – China’s actual GDP growth that year was 11 per cent.