China Lowers Growth Goal to About 7% as Li Flags Challenges

Record Number of U.S. Companies Bet on China

China set the lowest economic growth target in more than 15 years and flagged increasing headwinds as leaders tackle the side effects of a generation-long expansion that spurred corruption, fueled debt and hurt the environment.

The goal of about 7 percent -- down from last year’s aspiration of about 7.5 percent -- was given in Premier Li Keqiang’s work report at the annual meeting of the legislature in Beijing Thursday. Fiscal policy will remain proactive and monetary policy prudent, while the yuan exchange rate will be kept at a reasonable and balanced level, the government said.

Headwinds that include a property slump, excess industrial capacity and disinflation prompted the second interest-rate cut in three months at the weekend. Policymakers flagged a wider budget deficit this year of about 2.3 percent of gross domestic product, adding fiscal firepower to the monetary stimulus.

“The economy is in transition, and the government is committed to reforms and the anti-corruption campaign,” said Tao Dong, chief regional economist for Asia excluding Japan at Credit Suisse Group AG in Hong Kong. These “are important for China in the long run, but undermine growth momentum in the short run,” he said.

Shares fell, led by energy and power companies including Huaneng Power International Inc. Train-related companies China CNR Corp. and CSR Corp. rallied more than 6 percent in mainland trading after Li said the nation is investing more than 800 billion yuan ($128 billion) in railway construction.

Work Report

Li’s work report, which opened the meeting of the National People’s Congress, is his second since the 59-year-old was named premier toward the end of 2013’s legislative gathering. Along with President Xi Jinping, Li is seeking to increase efficiencies and strengthen market forces after GDP growth in 2014 was the slowest in 24 years.

“The difficulties we are to encounter in the year ahead may be even more formidable than those of last year,” Li said. “China’s economic growth model remains inefficient: our capacity for innovation is insufficient, overcapacity is a pronounced problem, and the foundation of agriculture is weak.”

Policymakers are trying to balance the need to cushion the economy’s slowdown with monetary and fiscal stimulus against longer-term goals. They’re seeking to increase the role of private business, promote innovation and reshape the fiscal framework as they shift the economy from reliance on debt-fueled investment toward greater consumption and services.

“The 7 percent GDP growth target isn’t so important as we are in a transitional economy,” Guo Shuqing, governor of Shandong province, said in an interview in Beijing. “The focus should be on the efficiency and the quality of growth. We also need to take into consideration environmental costs and pollution.”

Social Security

The government last targeted growth of about 7 percent in 1999 when China ended up achieving a 7.6 percent expansion.

China will reform the budget system, encourage private consumption and strengthen social security, Li said in the work report. It will aim to keep the urban unemployment rate under 4.5 percent, expand M2 money supply by about 12 percent, and target trade growth of about 6 percent this year.

Li has previously said a slower expansion is tolerable as long as enough jobs are created. Even after economic growth waned to 7.4 percent last year, the nation created 13.2 million new urban jobs, exceeding a target of 10 million and the previous year’s 13.1 million.

Fastest Growth

The goal of about 7 percent compares to the International Monetary Fund’s forecast of a 6.8 percent expansion this year and the World Bank’s 7.1 percent estimate. At that pace, China’s set to remain the fastest growing Group of 20 nation.

The lower target “is an acceptance of reality as well of course as reconfirming the desire for quality over quantity,” said Jim O’Neill, the former chairman of Goldman Sachs Asset Management. To make the same contribution to global GDP growth, Japan would need to expand 14 percent, he said. The IMF forecasts Japan will grow 0.6 percent this year.

China’s inflation target was set at about 3 percent and stable growth in aggregate financing will be targeted. Policymakers will flexibly use interest rate and required reserve ratio tools, the government said.

Reflecting the deepening concern over the economy’s slowdown, the People’s Bank of China announced the second interest-rate cut in three months on Saturday. It will lower benchmark lending and deposit rates again next quarter, according to economists surveyed by Bloomberg.

The PBOC joined a global easing wave that comes as the Federal Reserve edges closer to increasing interest rates, a move that would draw funds away from emerging markets.

Confidence Boost

Recent policy moves have helped boost confidence, National Development and Reform Commission Chairman Xu Shaoshi said at a briefing in Beijing. February leading indicators show improving sentiment and expectations of growth, he said.

The government projects a budget shortfall of 1.62 trillion yuan in 2015, the Ministry of Finance said. China will rebuild rundown urban areas, further railway, highway and waterway projects in central and western regions, invest in clean-energy projects and work to modernize agriculture, Li said.

“Policy is rotating from a greater role for monetary policy in supporting growth to a greater role for fiscal policy,” Tom Orlik, chief Asia economist at Bloomberg Intelligence in Beijing, wrote in a note.

To defuse problems and “avoid falling into the ‘middle-income trap’ and achieve modernization, China must rely on development, and development requires an appropriate growth rate,” Li said in the work report.

Slower Potential

Acknowledging the slowdown with a lower growth goal reduces pressure to build up debt in pursuit of unrealistic targets, said Andrew Batson, director of China research at GaveKal Dragonomics in Beijing.

“Neither economic logic nor the examples of other developing countries support the idea that China’s potential growth should remain static over long periods of time, in the face of rising incomes and structural change,” Batson wrote in a report. “Indeed as other Asian economies, following development strategies similar to China’s, have gotten richer, their growth rates have gradually but steadily come down. This is not a sign of failure but of success.”

— With assistance by Kevin Hamlin

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