China: Leadership adopts more growth-supportive stance amidst uncertain economic situation
March 16, 2016
Premier Li Keqiang recently stated that the country has to prepare for a difficult battle if it is to achieve the desired economic growth as the country grapples with mounting economic challenges at home and increasing global uncertainties. Li made this declaration during the opening of this year’s National People’s Congress (NPC), which ran from 5 to 16 March. In the Government Work Report presentation, Li announced the reduction of the country’s growth target from “approximately” 7.0% in 2015 to between 6.5% and 7.0% in 2016. The target growth for nominal fixed-asset investment was lowered by 4.5 percentage points to 10.5% (2015 final result: +10.0%), while the growth target for retail sales was cut from 13.0% to 11.0% (2015 final result: +10.7%). The government kept last year’s goal of creating 10 million new urban jobs in order to maintain the registered urban unemployment rate at or below 4.5%. The inflation goal for this year is 3.0%, as it was last year.
Li signaled the adoption of a more accommodative stance, as the government will pursue a “more” proactive fiscal policy and a prudent monetary policy “with flexibility”. On the fiscal side, the general budget deficit was officially set at 3.0% of GDP for this year, which is significantly above the 2.3% of GDP established in 2015. That said, the fact that the actual figure for 2015 came in at 3.5% of GDP suggests that there will be room to increase the fiscal gap further if necessary. The larger fiscal shortfall will be earmarked not only to bolster investment projects (primarily transportation and energy), social housing and public spending, but also to cut taxes and fees. The reduction in taxes and fees is aimed at encouraging consumption and innovation. Li also announced the nationwide implementation of the Value-added Tax reform. The lifting of the M2 growth target from 12.0% in 2015 to 13.0% this year is in line with the authorities’ intention to ensure ample liquidity. On the sidelines of the meeting, Zhou Xiaochuan, governor of the People's Bank of China (PBOC), confirmed that the Bank will stick to the prudent monetary policy with a slight loosening bias. Additionally, he provided assurance that the country is able to meet its economic targets without extra monetary stimulus and cautioned about the recent surge in property prices in big cities.
Reducing overcapacity (particular in steel and coal production), simplifying government procedures, continuing the transition toward higher-value industries and promoting innovation were the main areas of supply-side reforms. Regarding the long-awaited overhaul of State-Owned Enterprises (SOE), while details were scarce, Li vowed to promote mixed ownership structures, strengthen the participation of private capital in SOE and open new sectors to private competition. Nevertheless, analysts warn that China’s challenging economic conditions could force authorities to sacrifice the speed of the reforms in favor of stronger growth in the short term.
In the same venue, Li drafted the key targets of the 13th Five-year Plan (2016–2020), which included an average GDP growth for the period of 6.5%, an increase of the urbanization ratio from 45% to 60%, further expenditure in research and development, a full coverage of basic healthcare, among other goals . The crucial point for the government until the end of this decade is to avoid being caught in the middle-income trap and to achieve a more balanced economic growth.
Overall, the economic targets and policies unveiled at the NPC were not surprising and were completely in line with the blueprint delivered at the Central Economic Work Conference (CEWC) held in December. That said, the announcements highlighted the fragile equilibrium that the government is facing between promoting still-strong growth and moving structural reforms forward. With an economy showing signs of fatigue, China’s leadership might be tempted to use some of the old recipes—mainly cheap credit and bolstering investment—to revive the economy at the expense of slowing much-needed economic reforms down and increasing financial risks.
While most headlines have highlighted the fact that growth has fallen to multi-decade lows, the key question regarding China’s economy is whether the current economic slowdown is more related to structural macroeconomic imbalances or if, on the contrary, it reflects a genuine shift to a more sustainable growth path. Given that economic indicators are pointing in different directions and there is no clear answer, analysts will have to follow how developments unfold closely in the coming months. The progress in the implementation of December’s CEWC roadmap, which was rubber-stamped at the NPC, will be crucial in determining what the future course of China’s economy will be.