China Reforms Seen Adding Less Than Half Point to Growth

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Photographer: Brent Lewin/Bloomberg

A man is silhouetted against the sun as he walks his bicycle down a flight of stairs in front of Canton Tower in Guangzhou.

China’s broadest economic reforms since the 1990s will add less than half a percentage point to annual growth this decade, a survey showed, underscoring the likelihood of a cut in the nation’s expansion target.

Fourteen of 19 economists see policies from a Communist Party summit last month boosting gross domestic product either by a negligible amount or less than 0.5 percent a year compared with their previous outlook, according to the Bloomberg News survey. Ten analysts say China will need at least a small amount of monetary, fiscal and credit stimulus to meet the government’s “bottom line” of 7 percent growth in the next five years.

The forecasts dovetail with increasing speculation that policy makers will set the lowest annual growth target since 2004 at a gathering this month, after leaders pledged to give markets a bigger role in setting prices for capital and resources such as energy. President Xi Jinping is trying to sustain long-term expansion while overcoming risks from rising debt and pressures on government-backed companies.

“The reforms are going to be incrementally positive for growth as capital and resources are used more efficiently and wastage is cut,” said Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong who responded to the survey conducted Nov. 22-27. “But some state-owned enterprises will have to pay as they lose their old monopoly status and over one to two years there’s a significant risk that the debt issue deteriorates.”

2014 Target

The State Information Center, a government research institute, says China can set the 2014 GDP growth target at 7 percent, the Economic Information Daily reported this week, citing an annual report from the organization. The state-run Chinese Academy of Social Sciences also believes the goal will be set at 7 percent, the newspaper said.

The report “suggests that a 7 percent target has become a more likely choice,” Zhang Zhiwei, chief China economist at Nomura Holdings Inc. in Hong Kong, said in a Dec. 3 note. Zhang said leaders will decide on the goal at an annual economic work conference this month. The government usually publishes the target each March at the annual meeting of the National People’s Congress in Beijing.

While Citigroup Inc. and Barclays Plc also say the government may set the 2014 growth goal at 7 percent, Louis Kuijs at Royal Bank of Scotland Group Plc says he wouldn’t be surprised if it remains at 7.5 percent.

November data due next week are projected to show a cooling of domestic demand. The customs administration may say Dec. 8 that imports probably rose 7 percent from a year earlier, the slowest pace in four months, while export gains accelerated to 6.5 percent, according to median estimates in Bloomberg surveys of analysts.

Subdued Inflation

Consumer inflation may have decelerated to 3.1 percent, the statistics bureau will say on Dec. 9, staying below the government’s 2013 goal of 3.5 percent for an 11th month, according to another survey. Data the next day may show gains in industrial production and retail sales eased from a year earlier.

“The economy is slowing gradually because stimulus has begun to be withdrawn,” said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole CIB in Hong Kong. He cited an increase in money-market rates as a sign that the central bank is “keeping tight liquidity.”

The benchmark seven-day repurchase rate increased to 4.57 percent yesterday from as low as 3.34 percent in October.

Potential Growth

In the longer run, China will need a significant amount of stimulus to achieve 7 percent expansion, Kowalczyk said. That’s because China’s potential growth rate is now 5 percent to 6 percent a year, requiring policy makers to generate 1 to 2 percentage points of growth annually “for the foreseeable future” via stimulus, he said.

Kowalczyk was the only survey respondent to say China would need a “significant” amount of stimulus though not on the scale of programs begun in the wake of the 2008 financial crisis.

The Communist Party last month released a 60-point document after a four-day meeting to map out a blueprint for reform. Shifts include loosening the one-child policy, increasing property rights for farmers and encouraging private investment in state businesses. Leaders set a 2020 goal to meet the road map.

Right Direction

“If China smoothly delivers the reforms as outlined in the plenum report then it’s heading in the right direction and risks are getting smaller and smaller,” said Zhu Haibin, chief China economist at JPMorgan Chase & Co. in Hong Kong, who previously worked at the Bank for International Settlements.

Eight respondents, or 42 percent, said they’ve boosted forecasts for GDP by 0.1 percent to 0.4 percent a year through 2020 above what they otherwise would have forecast as a result of the reforms highlighted in the plenum document, while four analysts see the policies adding to GDP by 0.5 percent to 0.9 percent a year.

Six analysts said there will be no effect or a negligible impact and one economist saw the reforms reducing GDP by 0.1 percent to 0.4 percent a year, compared with their previous forecasts.

“On balance the package of policy proposals is good for growth” if it supports improved urbanization and productivity, said Kuijs, RBS chief China economist in Hong Kong, who previously worked for the World Bank in China. “What we’ve seen in so many other countries is that fundamental reforms are very difficult.”

To contact Bloomberg News staff for this story: Scott Lanman in Beijing at slanman@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: Arran Scott at ascott101@bloomberg.net

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