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China economy

Beijing lowers growth target to 6.5 per cent with eye on financial risks and economic restructuring

Premier tells NPC deputies China faces ‘risks and challenges, some foreseeable and others not’

PUBLISHED : Monday, 05 March, 2018, 8:33pm
UPDATED : Tuesday, 06 March, 2018, 12:36pm

Beijing has set a lower economic growth target for this year than the 6.9 per cent achieved last year as it keeps an eye on global trade uncertainties and long-term financial risks and seeks new drivers for the world’s second largest economy.

The growth target of “around 6.5 per cent” revealed in Premier Li Keqiang’s annual government work report on Monday morning did not surprise markets at home or abroad. But it gives the government more flexibility than last year’s target of “6.5 per cent and higher if possible”. 

Analysts said the change was reasonable given the tough tasks faced by the government in tackling financial risks, luring back private investment, revitalising state firms and encouraging technical innovation.

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Zhang Jun, chief economist at Morgan Stanley Huaxin Securities in Shanghai, said a lower growth target was a reflection of a range of economic uncertainties, including expectations of higher interest rates in the United States, the setting up of potential trade barriers by the Trump administration and domestic financial deleveraging. 

“This year’s growth target is no problem to accomplish,” he said. “If there are any signs of approaching the government’s floor, there’s plenty of room for policy loosening.”

Speaking on the sidelines of the annual meeting of the National People’s Congress, China’s legislature, which opened on Monday, Alfred Schipke, a China resident representative of the International Monetary Fund, said: “The growth target of about 6.5 per cent and addressing leverage … are the right emphasis. The report is broadly in line with our expectations.”

Li told the nearly 3,000 deputies at the meeting in the Great Hall of the People in Beijing that China faced “risks and challenges, some foreseeable and others not” in a pivotal period of transforming its growth model and shifting to new growth drivers.

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For exports, which gave the economy a significant boost last year, “policy changes of the major economies and their spillover effects create uncertainty, protectionism is mounting, and geopolitical risks are on the ascent”, he warned.

Domestically, the State Council, China’s cabinet, has to address high levels of debt, severe industrial overcapacity and a squeeze on private investment, all the result of previous stimulus measures.

The government’s determination to shift away from investment-led growth was seen in the announcement of the first cut in the fiscal deficit ratio in three years and the continued commitment to clean up 16 trillion yuan (US$2.5 trillion) of confirmed local government debt and hidden liabilities in financial guarantee, financing vehicle and public-private partnership projects.

The Ministry of Finance has set a fiscal deficit target of 2.6 per cent of gross domestic product (GDP), down from about 3 per cent in the previous two years. 

For the first time, the cabinet did not set a target for growth in M2 broad money supply this year, but the National Development and Reform Commission, China’s economic planner, had said previously it would be roughly same at last year’s target of 8 per cent. The actual growth last year came in at 8.2 per cent.

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“The pace of financial regulation and deleveraging could be adjusted according to the situation,” Zhang said.

At a media briefing on Monday afternoon, Huang Shouhong, the head of the State Council’s Research Office, said great efforts would be made to boost reforms if the economy stayed in a reasonable range. 

“A slightly higher or lower growth than [target] can be accepted if employment, incomes and the environment have improved,” Huang said.

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Tom Rafferty, chief China analyst at the Economist Intelligence Unit, attributed the softer tone on growth to the fact that guarding against financial risks remained high on the government agenda.

“The government’s bottom line for economic growth is likely to be 6.3 per cent”, he said, saying it was the minimum average Beijing needed to achieve its target of doubling 2010 GDP by 2020.