CHINA HAS SET its growth target for this year at ‘around 6.5%’, prime minister Li Keqiang told the annual session of parliament. That is down from 2016’s goal of 6.5%-7% and the outcome of 6.7%.
The glide path to slower but more sustainable growth continues. However, it will be a more cautious approach this year ahead of an important party plenum later this year at which the scope of President Xi Jinping’s second term and eventually succession will be set.
China also faces a more uncertain external environment economy than any time since the 2008 global financial crisis, while the stimulus that staved off deflation last year has left the debt crisis still to be dealt with. While China is perfectly able to deal with that on a macro level, signs of local stress are increasingly apparent. The finance ministry has again just warned of the ‘the hidden-debt risks of local governments’, especially in the rust belt in the Northeast.
Li’s signalled that the leadership considered 6.5% growth a floor, though if there is any suggestion of social or political instability (and especially instability within the political elites), that floor will, no doubt, be lowered.
Last year, 726,000 workers were shifted out of rust-belt industries; this year another 500,000 will follow, according to the labour minister. China created more than 13 million new jobs last year, according to the official figures, but a further half a million redundant iron and steel workers and coal miners is a lot to absorb, and especially in places where few new industries are flourishing.
Removing excess capacity from heavy industry has proved more difficult than planned as has killing off ‘zombie’ state-owned enterprises.
Rebalancing the economy has also progressed more slowly than Xi laid out when he assumed the leadership four years ago; one reason is that he has repeatedly turned to old-school stimulus whenever the economy looked to be slowing too rapidly.
The government will have work to do to reduce last year’s fiscal deficit of 3.8% of GDP to the wished-for 3.0% (which was also last year’s target).
Li set another ‘about’ target, of ‘about 12%’ for broadest measure of money supply (M2). While that is less than 2016’s target 13%, it is still above end-2016 money supply growth of 11.3%. More monetary policy tightening is likely, barring severe adverse external headwinds.
The military budget will again be restricted to a 7% increase (1.3% of GDP), even though US President Donald Trump has promised a 10% hike in the United States’ defence budget. The United States spends 3.3% of its GDP on defence.
Beijing’s holding fast after decades of double-digit growth will increase the already sizeable spending gap, $600-plus billion a year against $140 billion a year, though off-budget procurement could add a further $50 billion to China’s number and the modernisation of the PLA will continue.