Shrinking China’s growth target gives room to tackle debt

Bloomberg

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People look at portraits of former Chinese leaders Zhou Enlai, left, Mao Zedong, center, and Liu Shaoqi displayed in a shop on Wangfujing Street in Beijing, China. People look at portraits of former Chinese leaders Zhou Enlai, left, Mao Zedong, center, and Liu Shaoqi displayed in a shop on Wangfujing Street in Beijing, China.
China will set an economic growth target of about 7 percent for 2015, tolerating the weakest expansion in a generation as leaders tackle debt risks and imbalances, according to analysts polled by Bloomberg.
Thirteen of 22 economists said China will shoot for about 7 percent next year, down from this year’s 7.5 percent. Sixteen said the government should change its targeting policy, with nine indicating a range would be better and seven suggesting targets be scrapped altogether in favor of projections or assumptions of growth, as most other nations provide.
The government is holding off broad stimulus, with Premier Li Keqiang expressing a preference for policy improvements and People’s Bank of China Governor Zhou Xiaochuan vowing to stick with a prudent monetary stance. Weighed down by a property slump, gross domestic product probably expanded 7.2 percent in the third quarter, the slowest in more than five years, economists forecast ahead of data due Oct. 21.
“Setting 7.5 percent this year gave Beijing too little space for reform and deleveraging,” said Yao Wei, a Paris-based China economist at Societe Generale SA. “The recent talks from policy makers sent strong signals that the growth target is less important as long as the labor market is stable. That suggests a new consensus is forming at the top that more slowdown should be tolerated.”
Yao expects the government will set a range of 7 percent to 7.5 percent and said there’s “no indication” that anything below 7 percent is acceptable to the government yet.
Fourth plenum
China’s premier typically announces the annual growth aspiration at the National People’s Congress in March, after policymakers meet late in the year at the Central Economic Work Conference to hash out policies. The Communist Party’s top officials gather in Beijing next week for the fourth plenum, where moves to centralize and standardize the legal system are expected to top the agenda.
The broadest measure of new credit rose to a three-month high in September as the central bank’s targeted measures to boost liquidity helped spur lending, data yesterday showed. Subdued inflation figures released a day earlier suggest the central bank has more room to further ease monetary policy.
The PBOC cut the interest rate it pays lenders for 14-day repurchase agreements for the second time in a month this week. Next week’s data -- including GDP, industrial production and investment -- will help show whether more easing is needed.
China’s main government-backed research organization this month gave one of the strongest signs yet that leaders will keep eschewing broad stimulus just to meet this year’s goal. The Chinese Academy of Social Sciences forecast a 7 percent expansion next year, according to the state-run Shanghai Securities News. The Beijing-based institution estimates growth of 7.3 percent this year, the newspaper reported.
Above target
China’s growth goal was 7.5 percent in 2012 and 2013, and expansion came in at 7.7 percent each year.

Motorcyclists drive through a junction in Beijing. China has taken steps away from its addiction to GDP targeting, with the creation of a dashboard of more than 40 economic indicators to measure the efficiency and quality of growth.
The International Monetary Fund in July urged China to set a growth target of 6.5 percent to 7 percent for 2015, warning of a “web of vulnerabilities” in the economy from real estate and rising debt. This month, it forecast 7.4 percent GDP growth this year and 7.1 percent in 2015.
“Lowering the growth target to about 7 percent will provide more room for reform,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong. “Reforms and economic rebalancing will cause traditional overcapacity industries to slow down, but it will take time for new sectors to grow. It will be reasonable to lower the growth target.”
President Xi Jinping said in May that the nation needs to adapt to a “new normal” in the pace of growth.
New dashboard
China has taken steps away from its addiction to GDP targeting, with the creation of a dashboard of more than 40 economic indicators to measure the efficiency and quality of growth. The set will comprise existing data such as GDP and new items including the ratio of fiscal debt to revenue and the proportion of workers involved in research and development, the National Bureau of Statistics said last month.
In the long run, “China should give up targeting GDP completely and instead focus on employment and inflation, given how difficult it is to determine what the sustainable level of GDP growth actually is,” said Julian Evans-Pritchard, China economist for Capital Economics Ltd. in Singapore.
That echoes the view of Standard & Poor’s Singapore-based economists Paul Gruenwald and Vincent Conti, who last month said China’s adherence to targeting is hurting financial stability. In the absence of export demand or productivity gains, officials who have incentives to outperform growth targets turned to credit creation that fanned a surge in bank credit, the economists wrote in a Sept. 15 report.
Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said while the government’s growth target “is no longer taken as the golden rule” it is still “necessary for economic planning and policy adjustments.”
Expecting a 6.7 percent target next year, Shen said “we believe that the target should be lowered to give the government the freedom to launch structural reforms.”

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