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China Economy

Beijing may drop growth target after Communist Party congress, research firm’s chief says

Louis-Vincent Gave, co-founder of Gavekal Research, said it is too costly for China to chase a headline growth rate while delaying structural reforms

PUBLISHED : Wednesday, 02 August, 2017, 9:07am
UPDATED : Wednesday, 02 August, 2017, 11:15pm

The Chinese government likely will drop its annual gross domestic product target after the Communist Party’s 19th national congress this autumn, a research agency’s chief executive said on Tuesday.

Louis-Vincent Gave, co-founder of Gavekal Research, said in Hong Kong that Beijing was likely to abandon an annual economic growth target because it was increasingly costly for China to run after a headline growth rate at the cost of delaying much-needed structural reforms. Although the move could slow down short-term growth it could promote longer-term sustainable growth, he said.

“The 6.5 per cent growth target, you can still achieve it, but at a higher and higher cost. So why would they want to keep doing that?” Cave said.

Debate has continued for years over whether China should keep its annual growth target. Many economists have said the yearly practice of setting a target is a legacy from the era of the planned economy and should be scrapped.

Others have argued in favour of maintaining targets, pointing out that China must maintain annual average growth of 6.5 per cent through to 2020 if it is to achieve its strategic goal of doubling per capita GDP over 10 years starting in 2010.

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Under present practice, the premier reads out a yearly growth rate in early March that receives rubber-stamp parliamentary approval. The 2017 rate was set at “about 6.5 per cent”, and China’s actual economic growth in the first half was 6.9 per cent.

The country’s economic momentum, however, came at a cost: rising debt and growing financial risk. President Xi Jinping has made risk control a priority of the government’s economic policy.

“The biggest surprise of 2016 … is that China [growth] re-accelerated,” Gave said. “And indeed the question is: is this re-acceleration for real and how long it will last?”

By dropping a growth target, China can avoid “Wen Jiabao put”, a phrase named after China’s former premier that refers to Beijing’s insistence on generating a set annual economic growth figure whatever the implication – or, put another way, stepping in to bolster economic growth whenever the growth rate slows to a level below the government target.

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After the 2008 global financial crisis, then-premier Wen rolled out a massive Chinese stimulus package, through cheap bank loans, to propel expansion. The policy is similar to the “Greenspan put”, which refers to former US Federal Reserve chairman Alan Greenspan’s monetary policy that encouraged risk-taking in the financial markets.

By putting the growth target aside, Xi, who is expected to further consolidate his power at the upcoming party congress, can turn the country’s attention to deep-rooted structural issues.

“A lot of foreign investors don’t invest in China because they are very worried about structural stability and wondering if there is a banking crisis and others,” Gave said.

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Gave also said that concerns about an immediate China financial crisis had largely been dispersed, citing his client meetings in the United States.

“When China comes up at every one of my meetings, that’s historically a sign that you shouldn’t worry about China,” he said.