China’s Finance Minister Lou Jiwei said growth as low as 7.2 percent would meet this year’s target of “about” 7.5 percent as he tried to moderate expectations for an economy at risk from swelling debt.
The key is employment, not the exact level of growth, Lou said at a press briefing in Beijing today as part of the annual meeting of the National People’s Congress, the legislature. Expansion of 7.2 percent or 7.3 percent would be consistent with the goal announced yesterday, he said.
The comments boosted speculation that the nation may fail to exceed the government’s annual target for the first time since 1998, when Asia was grappling with its financial crisis. Investors are trying to get a fix on the depth of any slowdown that the Communist Party will allow as the pace of expansion eases after decades of export and investment-fueled growth.
“This flexibility allows them to flag an encouraging number to the business community but at the same time to feel free not to react with stimulus and more debt if it’s missed a bit,” said Dariusz Kowalczyk, Hong Kong-based economist and strategist at Credit Agricole CIB.
The benchmark Shanghai Composite Index (SHCOMP) fell as much as 1.1 percent after Lou’s comments before rebounding to rise 0.3 percent at 2:13 p.m. local time. The yuan headed for its biggest two-day rally in two years on speculation the central bank is allowing gains after guiding the currency weaker to engineer more two-way volatility.
The stock index dropped yesterday amid concern that the country may face its first onshore corporate bond default. Shanghai Chaori Solar Energy Science & Technology Co. said it may not be able to make an 89.8 million yuan ($14.7 million) interest payment in full by the March 7 deadline.
Premier Li Keqiang announced the economic growth target yesterday in his first annual work report to the legislature. Some analysts see a slowdown as consistent with reining in a $6 trillion shadow-banking industry and controlling the build-up of local-government debt that followed stimulus measures unleashed in 2008.
Lou’s comments add to indications that the government is increasingly seeing the targets as midpoints in a range rather than minimum levels to be achieved. This year’s goal is “flexible and guiding,” the National Development and Reform Commission and Finance Ministry said in their work reports yesterday.
“Employment is the most important target for us,” Lou, a former chairman of the nation’s sovereign wealth fund, China Investment Corp., said today.
Lou, 63, has made waves before with comments on the expansion target. In a press briefing in Washington in July he said that a pace as low as 6.5 percent may be tolerable in the future. While the government had set a 2013 growth goal of 7.5 percent, Lou said he was confident 7 percent could be achieved.
Xinhua later amended its English-language report on Lou to say there’s no doubt that China can achieve the 2013 growth target of 7.5 percent.
“I’m afraid that we may repeat what we experienced last year given the confusion and inconsistent interpretations of the growth target,” said Liu Li-Gang, an Australia & New Zealand Banking Group Ltd. economist in Hong Kong, referring to Lou’s comment on 6.5 percent expansion.
Lou wasn’t the only official to indicate that a pace below 7.5 percent may be acceptable. Xiang Dong, a State Council researcher, was quoted on the government’s website yesterday as saying that a pace of 7.3 percent or 7.7 percent is within the target range. “Since it’s a target, there may be volatility and it’s normal,” Xiang said, according to a transcript of the comments.
NDRC Chairman Xu Shaoshi said yesterday that China’s bottom line for growth is about 7.5 percent, while 7 percent expansion is enough for the nation to achieve its long-term goal of establishing a moderately well-off society by 2020.
Growth of 7.7 percent in each of the past two years compared with a 7.5 percent goal. In 1998, the economy expanded 7.8 percent, compared with an 8 percent goal.
“The jury is still out on whether the new leadership’s commitment to reform is strong enough that they will allow anything lower than the stated number for the first time in decades,” said Yao Wei, China economist at Societe Generale SA in Hong Kong. “While Lou’s comments are reassuring, Premier Li’s report yesterday did repeat last year’s sentence on the growth target word for word.”
Li said last year that annual economic growth of 7.2 percent is needed to keep unemployment stable. His government has previously indicated that 7 percent is the “bottom line.”
“We use the word ‘about’ when we talk about” targets including gross domestic product, Lou said today. “For example, if GDP growth this year is not 7.5 percent, but 7.2 percent or 7.3 percent, would that count as ‘about’ 7.5 percent? Yes, that would also count.”
Ahead of the NPC meeting, Chang Jian, Barclays Plc chief China economist in Hong Kong, said that a 7.5 percent growth target would be “inconsistent with the medium-term objectives of mitigating financial risks and rebalancing the economy.” Even a pace of 7.2 percent would be more than the nation needed to generate jobs, given slowing expansion in the working-age population, Chang wrote in a Feb. 25 note.
The government has prepared policy “toolboxes” to handle different economic scenarios, Zhu Zhixin, an NDRC vice chairman, said to reporters today.
“If economic growth is steady, we will handle it with appropriate policies; if economic growth slides too quickly we will handle it with another set of policies,” Zhu said, declining to provide more details on the benchmarks for applying different policy tools. He said the “toolboxes” will involve fiscal and industrial policies.
“There’s clearly still a debate about what kind of growth rate is acceptable,” said Stephen Green, head of Greater China research at Standard Chartered Plc in Hong Kong. “I think the jobs market would be fine with a 7.2 percent official GDP print -- and at the end of the day that’s what matters.”
Premier Li, who reiterated that China will pursue a “prudent” monetary policy, announced a target of 13 percent growth in M2 (CNMS2YOY), the government’s broadest measure of money supply. That was the same target as last year, when M2 expanded 13.6 percent. The budget deficit as a percentage of GDP will be about the same as last year.
Kevin Lai, an economist at Daiwa Capital Markets in Hong Kong, said he “wouldn’t pay much attention to the rhetoric of these leaders,” when asked about Lou’s comments.
“If they are serious about deleveraging they will have to reduce the money supply,” Lai said. “If they do that many guys will have to default. This is something that’s not acceptable to them.”
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