China Lowers Growth Goal to About 7% as President Li Flags More Headwinds

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China Lowers Growth Goal to About 7% as Li Flags More Headwinds
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by Kevin Hamlin
11:02 AM AEDT
March 5, 2015

China's Economy
Red flags fly in front of the Chinese national flag, right, at Tiananmen Gate in Beijing. Policymakers are trying to balance the need to cushion the economy’s slowdown with monetary and fiscal stimulus against longer-term goals. Photographer: Tomohiro Ohsumi/Bloomberg
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(Bloomberg) -- China set the lowest economic growth target in more than 15 years and flagged increasing headwinds as leaders tackle the side effects of a generation-long expansion that spurred corruption, fueled debt and hurt the environment.

The goal of about 7 percent -- down from last year’s aspiration of about 7.5 percent -- was given in Premier Li Keqiang’s work report at the annual meeting of the legislature in Beijing Thursday. Fiscal policy will remain proactive and monetary policy prudent, while the yuan exchange rate will be kept at a reasonable and balanced level, the government said.

Headwinds that include a property slump, excess industrial capacity and disinflation prompted the second interest-rate cut in three months at the weekend. Policymakers flagged a wider budget deficit this year of about 2.3 percent of gross domestic product, adding fiscal firepower to the monetary stimulus.

“The economy is in transition, and the government is committed to reforms and the anti-corruption campaign,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. These “are important for China in the long run, but undermine growth momentum in the short run,” he said.

Shares declined in Shanghai.

Li’s work report, which opened the meeting of the National People’s Congress, is his second since the 59-year-old was named premier toward the end of 2013’s legislative gathering. Along with President Xi Jinping, Li is seeking to increase efficiencies and strengthen market forces.

“The difficulties we are to encounter in the year ahead may be even more formidable than those of last year,” Li said in the report. “China’s economic growth model remains inefficient: our capacity for innovation is insufficient, overcapacity is a pronounced problem, and the foundation of agriculture is weak.”
Balancing Act

Policymakers are trying to balance the need to cushion the economy’s slowdown with monetary and fiscal stimulus against longer-term goals. They’re seeking to increase the role of private business, promote innovation and reshape the fiscal framework as they shift the economy from reliance on debt-fueled investment toward greater consumption and services.

China will strengthen supervision in shadow banking, according to a work report from the National Development and Reform Commission also released Thursday. It will aim to keep the urban unemployment rate under 4.5 percent, expand M2 money supply by about 12 percent, and target trade growth of about 6 percent this year, it said.

Li has previously said a slower expansion is tolerable as long as enough jobs are created. Even after economic growth slowed to 7.4 percent last year, the weakest pace since 1990, the nation created 13.2 million new urban jobs, exceeding a target of 10 million and the previous year’s 13.1 million.
Fastest Growth

The goal of about 7 percent compares to the International Monetary Fund’s forecast of a 6.8 percent expansion this year and the World Bank’s 7.1 percent estimate. At that pace, it’s set to remain the fastest growing Group of 20 nation.

“The Chinese Government is simply managing a downshifting in growth to a more sustainable pace,” said Shane Oliver, head of investment strategy at AMP Capital Investors Ltd. in Sydney. “Given the rapid growth in the Chinese economy in recent times, 7 percent growth is equivalent to around 14 percent growth about 10 years ago in terms of China’s demand for global resources.”

The inflation target was set at about 3 percent and stable growth in aggregate financing will be targeted. Policymakers will flexibly use interest rate and required reserve ratio tools, the government said.
‘Latent Risks’

“Growth in investment is sluggish; the number of new areas of strong consumer activity is limited; there is no sign the international market is about to significantly pick up; maintaining stable growth is becoming more difficult, and there are still latent risks in some areas,” Li said.

The interest-rate cut announced Saturday reflected deepening concerns over the economy’s slowdown. The People’s Bank of China will cut deposit and lending rates again next quarter, according to economists surveyed by Bloomberg.

It joined a global easing wave that comes as the Federal Reserve edges closer to increasing interest rates, a move that would draw funds away from emerging markets.

The government last targeted an expansion of “about 7 percent” in 1999. China ended up achieving 7.6 percent growth that year.

“Policy makers have signaled acceptance of lower growth, allowing more space for reform and moderating expectations of aggressive stimulus,” Bloomberg economist Tom Orlik wrote. “A shrinking working-age population, overcapacity in industry, and a stressed financial system mean China’s potential to grow is not what it used to be.”

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