18 March 2016
China’s Economic Targets for 2016
The Government Work Report delivered at the 4th Session of the just-concluded 12th National People's Congress covers the following main points:
(I) Lowering the economic growth rate target to 6.5-7%. This is the first time China has given a range instead of a specific point for its growth target, suggesting that there will be greater flexibility for policies and the economy this year than in previous years. The continuing structural pressure of property destocking and manufacturing overcapacity both imply downside risks. However, for reasons such as the expanding shadow banking sector playing a bigger role in supporting steady growth, the economy may see a quarterly rebound and the second quarter may witness the best performance this year with the simultaneous growth of both shadow loans and balance sheet loans.
(II) Raising the deficit-to-GDP ratio to 3%. The proactive fiscal policy looks even more proactive with a 0.7 percentage point increase of the deficit-to-GDP ratio from 2.3% to 3%. However, considering that last year's actual deficit reached 3.5% of GDP, there is limited fiscal leeway even if the set ratio is again exceeded. The reason is that turnover tax as main contributor to revenue will drop significantly in a downside economy (with revenue growth at a meagre 5.8% last year). The key driver of steady growth this year is not fiscal policy in the narrow sense but "big finance" represented by targeted construction funds and public-private partnerships (PPP). PPP projects may see more rapid growth in transportation, environmental protection, development of industrial parks, water supply projects and other areas. The value of contracts is expected to exceed Rmb2 trillion.
(III) Raising the M2 growth target to 13%. (1) With the monetary policy shifting its emphasis from monetary easing to credit easing, M2 growth for the whole year is expected to reach 13-14%. This is partly because banks will find new investment channels for public credit through targeted construction funds and PPP and partly because banks have the incentive to increase their credit base against the backdrop of the narrowing interest spread and small prospects for bond yield increase. However, the central government will not easily allow money supply to increase as it did in 2009. If M2 credit soars at a faster than anticipated pace as in January, the regulatory body will definitely act to avert financial risks. (2) There is the likelihood of a policy reversal from equal emphasis on price control and quantitative control to one with quantitative control playing a dominant role. This year's conditions are rather special. There is not much prospect for price control under the pressure of exchange rate and inflation, but maintaining stable capital growth and credit expansion through quantitative control in tandem with stable growth achieved through the expansion of shadow loans is still essential.
(IV) Controlling the CPI growth at about 3%. Inflationary pressure will be significantly greater in 2016 than in the previous two years. This is especially true in the first half of the year. With credit expansion becoming a driving force for economic stability, the prices of food and commodities will see big increases, exceeding 2% in some months. However, the economy will still face downward pressure for the whole year as the effects of short-term policies wear thin. Quasi-stagflation will not last long and inflationary pressure for the whole year can be controlled because China lacks a prerequisite for stagflation: cost impact, such as the oil crisis in the 1970s.
(V) Keeping the Rmb exchange rate generally stable. The Rmb continues to be under deflationary pressure as it tries to remain generally stable relative to a basket of currencies against a strong dollar. However, the exchange rate is expected to be kept at less than 7 yuan to US$1 for the rest of this year. Conditions are expected to be better in the first six months than in the second half of the year. First, the economy will remain stable in the short term as monetary expansion gives way to credit expansion. Second, capital control is strengthened. Third, interest rate rise expectations are at a periodic low.