Mar 07, 2016
China gave itself wiggle room in lowering its economic growth target this year, though it still set the pace at a relatively high 6.5% to 7%, suggesting the government prefers buoying the slowing economy to more painful retrenchment.
In opening the National People’s Congress on Saturday, Premier Li Keqiang laid out policies and goals for the year that aim to stimulate growth and encourage restructuring of industries afflicted with overcapacity.
This year’s policy plan, however, left unclear how Beijing would balance its growth objectives and its reform goals. Economists said it would be hard to achieve both.
“We believe the top priority of the policy makers has turned to growth,” wrote Mizuho Securities Asia Ltd. economist Jianguang Shen in a research note. “It is intrinsically difficult to consolidate production capacity while carrying out stimulus.”
Mr. Li acknowledged the dilemma. “Pursuing development is like sailing against the current: You either forge ahead or drift downstream,” he said in one of the notes of urgency in his nearly two-hour speech.
He told the roughly 3,000 delegates at this year’s annual legislative sessions: “This is the crucial period in which China currently finds itself and during which we must build up powerful new drivers in order to accelerate the development of the new economy.”
For the first time in two decades, Beijing adopted a range for its growth target rather than a specific number, giving itself more flexibility in a system where hitting stated goals remains politically important. Mr. Li said growth over the next five years should average at least 6.5%.
The growth goal posts, above expectations for Chinese expansion from Western economists and the International Monetary Fund, send a signal to ordinary Chinese that raising their living standards remains a priority and to the world that China will continue to be a global economic engine.
But it also could exacerbate imbalances in an economy with too much debt, industrial capacity and housing.
Money is already flowing into property in major cities such as Beijing and Shanghai, while most other urban areas have a glut of apartments. “The divergence between housing markets…is getting more and more severe,” Cheng Zhenggao, the housing minister, told reporters Saturday.
Mr. Li said: “We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructuring and bankruptcy liquidations.” Zombie enterprises, a term that Chinese officials have embraced recently, are unproductive businesses kept alive by debt and subsidies.
He said 10 million jobs would be generated in urban areas and unemployment would be kept below 4.5% in cities. Among the job-creation initiatives were an 800 billion yuan ($122.9 billion) investment for railway construction and 1.65 trillion yuan to build roads.
To leave room for more spending, the targeted budget deficit will be 3% of gross domestic product this year, up from 2.3% in 2015, according to Mr. Li’s report.
The report didn’t give a specific target for China’s foreign trade, a departure from past years, reflecting both weaker global demand and the diminishing importance of exports as a growth driver. Last year, Beijing set a goal for a 6% increase in trade; instead both exports and imports fell.
A five-year economic blueprint also released Saturday set plans to ease controls on overseas investment and access for foreigners to China’s capital markets and pledged that its currency, the yuan, would become fully convertible by 2020. Confidence in China’s markets among global investors was rattled last year by a poorly signaled yuan devaluation and by botched efforts to salvage a cratering stock market.
Private-sector delegates at the meeting were heartened by Mr. Li’s pledge to reduce corporate taxes and fees this year. “We just want to be treated equally, alongside state-owned enterprises,” said Chen Zhilie, executive chairman of EVOC Intelligent Technology Co.
Beijing also said it plans to raise military spending in 2016 by 7.6%. This would be the slowest pace in six years but still larger in percentage terms than the 7% increase for the overall budget, suggesting the military still gets an outsize share of government resources.
The lowered targets for overall growth released Saturday weren’t a surprise given that senior officials from President Xi Jinping on down had flagged them in recent months.
Last year, China grew 6.9%, its slowest pace in 25 years, compared with a 2015 target of about 7%. This year’s target sets the stage for a new quarter-century low.
The government pledged to continue retooling the economy toward consumption and services as it tries to wean itself from its decadeslong dependence on investment and manufacturing.
China has outlined plans to pare jobs and cut excess production by about 10% over the next several years in the steel industry. But economists question whether this goes far enough given that excess capacity in the steel industry is currently around 30%, according to industry figures.
“The critical issue for me is how deep and aggressive this restructuring process will be and how quickly it will be implemented,” said Adam Slater, economist with Oxford Economics.
China’s leaders have said that part of the difficulty in letting zombie factories fail is resistance from local governments.
After a three-year campaign against corruption, Mr. Xi has recently stepped up efforts to get officials to fall in line with party directives. Mr. Li also appeared to take a stab at bureaucratic foot dragging, saying Beijing will punish “all types of behavior that constitute flagrant violations of discipline.”
China is banking on new sources of growth, including deregulation, innovation and larger city groupings, to pick up the slack left by falling productivity, weak property investment and a maturing economy.
However, some of the newer plans to promote services and higher-tech industries also came with echoes of big state planning: The government says it will establish demonstration centers for startups and provide support for projects in high-performance microchips, biomedicine and advanced displays.
Mr. Li, who has championed urbanization as a way to build a consumer society, said building up cities is “the most powerful force for sustaining economic development.”
So far, these new drivers haven’t kicked in enough to counter the economy’s many downdrafts. That has added to concerns that China will put reform on the back burner in favor of excessive fiscal and monetary stimulus to reach its targets through 2020.