China Sets Growth Target of About 6.5% Amid Pledges to Ease Risk

EghtesadOnline: China set a 2017 growth target of "around 6.5 percent, or higher if possible" as focus shifts to easing risk and ensuring stability before a twice-a-decade leadership transition this year.

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05 March 2017

The objective outlined Sunday in the work report presented by Premier Li Keqiang to the National People’s Congress gathering in Beijing compares with last year’s target range of 6.5 percent to 7 percent. Economists surveyed by Bloomberg project 6.5 percent expansion this year, Bloomberg reported.

Other objectives included:

The M2 money supply growth target was lowered to about 12 percent from 13 percent last year

Consumer price index target of about 3 percent increase was unchanged from last year

Fiscal budget deficit ratio goal at 3 percent of gross domestic product, also unchanged

Retail sales growth goal lowered to about 10 percent from around 11 percent last year

Top leaders working to underpin an economic expansion that stabilized last year also are shifting to a more neutral policy to reduce financial risks from excessive borrowing. Economic and social stability are key priorities before President Xi Jinping and his cadres gather later for a reshuffling of top officials, which is planned for the fourth quarter.

"China has lowered the economic development targets across the board," said Zhou Hao, an economist at Commerzbank AG in Singapore. "China’s policy stance has turned to risk control and bubble deflating. This means that the monetary policy will gradually tighten."

The work report reiterated that China will pursue a prudent and neutral monetary policy this year. The People’s Bank of China has left the benchmark rate at a record low while starting to tighten money market rates, and analysts expect further measures to cool lending without choking the wider economy ahead of the 19th Communist Party Congress.

Li’s report sounded a hopeful note with the addition of language calling for growth above the target if possible, while also emphasizing the need to reduce threats to that expansion. China is confident it can keep systemic financial risk in check, and is "highly cautious" of the dangers from bad loans, bond defaults, shadow banking and online finance.

Despite pledges to keep an eye on emerging risks, the credit taps are still flowing freely. Aggregate financing, the broadest measure of new credit, climbed to a record 3.74 trillion yuan ($545 billion) in January. The credit-to-GDP ratio rose nearly 100 percentage points in eight years to 260 percent by the end of 2016, according to Bloomberg Intelligence estimates.

Top leaders also face external uncertainty. Potential threats include a sharp drop in exports due to slowing demand or rising trade barriers -- U.S. President Donald Trump has promised tariffs on Chinese goods -- and faster-than-expected rate hikes by the Federal Reserve.

Excess Capacity

The work report also outlined objectives for attacking excess capacity by cutting 150 million metric tons of coal capacity this year and reducing steel capacity by 50 million metric tons. Urban home buying by both local and new residents will be supported, while another 6 million housing units will be renovated in urban areas, according to Li’s report.

Financial regulation will be "proactively and prudently reformed" and the industry’s ability to serve the real economy will be strengthened, the report said. Officials also vowed to accelerate reforms of state-owned enterprises and said "more will be done to energize the non-public sector." They also plan more support for technological innovation and the development of emerging industries.

The annual gatherings of the NPC and the Chinese People’s Political Consultative Conference, are known as the "two sessions." They include release of Li’s government work report and accompanying reports from the Ministry of Financeand top economic planning body, the National Development and Reform Commission, outlining plans for everything from ammonia nitrogen emissions to mobile phone roaming charges.

Over the longer term, policy makers aim for a 6.5 percent average growth pace to achieve the party’s promise of building a “moderately prosperous society” by 2020 with GDP and income levels double those of 2010. Xi isn’t wedded to the 6.5 percent goal due to concerns about rising debt, a person familiar with the situation told Bloomberg News in December.

The upcoming Party Congress marks a critical juncture in Xi’s leadership and will show the extent to which he has consolidated support since taking power in 2012. If retirement conventions hold, 11 of 25 Politburo members -- including five of seven members on its supreme Standing Committee -- would be expected to step down, leaving positions open.

Party leaders have repeatedly emphasized the need to maintain control before the conclave. Xi told a meeting of his National Security Commission -- its first known meeting since 2014 -- that safeguarding “political security” was the top priority.

"A slightly lowered and somewhat more flexible growth target is about as good as we could have asked for," said Andrew Polk, Beijing-based head of China research at Medley Global Advisors, which advises institutional investors. "We’d still like to see an abandonment of the growth target altogether, but that is just not in the DNA of China’s government."