Divyang Shah, Senior IFR Strategist
Under the old Chinese leadership of Hu/Wen, it was often a ‘whatever it takes’ kind of attitude toward meeting growth targets, with incentives geared to achieve this aim. The new leadership of Xi/Li will get a chance to reveal their agenda in the autumn, but it is already clear they are walking on a very different road.
Even with his remarks having been changed by Xinhua to repeat the official line on this year’s 7.5% growth target, FinMin Lou Jiwei’s comment that China was aiming for a 7% target provided a glimpse at this new thinking. The causality had always been assumed to run from growth target to stimulus levers. But the traditional stimulus has created several policy headaches - indebted local governments, excess capacity in certain industries, the rise of shadow banking - so the focus has shifted to more flexibility on growth.
An official shift will have to wait until we get closer to the plenary session of the Communist party later this year, but it was interesting that before Lou also decided to highlight:
1) how consumption and services are playing a bigger role in GDP and
2) c/a surplus has fallen as a share of GDP. This rebalancing is an important part of the story in accepting slower growth and eases concerns over social unrest and financial market instability due to slower growth.
Bringing expectations down from double digits to 7.0/7.5% was the easy part. Now a more delicate balancing act will be required. The growth target will be used to manage expectations, but there are few signs of wanting to hit the stimulus button.
At the current juncture, China seems to believe that it can stomach growth as slow as and maybe below 7%. Only if unemployment starts to increase will the focus on reform over growth targets start to change, and even them stimulus measures will be much more targeted than in 2009.
