China targets growth of 6.5–7 % this year

BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/10

Premier Li Keqiang revealed the growth target in his opening address to the National People’s Congress (NPC) last Saturday (Mar. 5). The NPC also reviews and approves the 2016–2020 five-year plan in which China seeks average annual GDP growth of at least 6.5 %. For those who had hoped China was finally ready to abandon rigid growth targets and accept slightly lower growth, the ambitious growth targets were a disappointment. The fear is that high growth targets imply soaring indebtedness and postponement of needed economic reforms. Amid the wide-spread concerns over a rapid deceleration in China’s growth, premier Li said that this year's target is set high also to guide market expectations.

While premier Li’s assessment hit familiar themes such as financial market reform, overhaul of state-owned enterprises and reducing overcapacity, it offered little in the way of concrete actions. Li said that China this year intends to improve the yuan exchange-rate mechanism and keep the yuan’s exchange rate “basically stable.” Increased innovation activity was proposed as a general cure for the economic slowdown. The 2016–2020 plan calls for an increase in R&D spending to 2.5 % of GDP, while energy efficiency will be improved and emissions reduced.

Achieving the growth target requires monetary and fiscal stimulus measures. Budget spending is planned to rise 7 % this year, which will boost the budget deficit. There is room to manoeuvre in monetary policy, as this year’s inflation target has been set at 3 %, while the broad money supply (M2) and broad credit measure (total social financing) each have growth targets of 13 %. Indebtedness is likely to rise swiftly if these targets are met; the expansion of credit is roughly double the rate of nominal GDP growth.

Show weekly Review 2016/09 Show weekly Review 2016/11