China to Abandon 6.5% Economic Growth Goal by 2018, SocGen Says

  • Policy makers want reduced risk after debt levels increased
  • ’We think that the arbitrary growth target will be given up’

China is poised to abandon its 6.5 percent growth target sometime in the next two years as leaders push to contain asset bubbles and financial leverage, according to Societe Generale SA.

Signals pointing to acceptance of an expansion below the current objective are encouraging, though authorities haven’t yet confronted the test of a deceleration, which will come in the second half of next year, Yao Wei, chief China economist at SocGen in Paris, said in a note.

She said the most likely change in guidance would be to the phrase “around 6.5 percent” in March, when top leaders convene, then an explicitly lower range of 6 percent to 6.5 percent, or even 5.5 percent to 6.5 percent, at the national Communist Party congress late next year.

"We think that the arbitrary growth target will be given up -- if not in 2017, then definitely in 2018," Yao wrote. "The harm of keeping it is all too apparent, for it has become not only an impediment to the necessary structural adjustments but also a culprit behind rapidly rising debt risk."

Last year, policy makers pledged an annual growth rate of at least 6.5 percent for five years through 2020 to achieve the party’s promise of building a “moderately prosperous society.” President Xi Jinping is open to growth slowing below the target due to rising debt and concern about an uncertain global environment after Donald Trump’s election win, a person familiar with the situation said last week.

Below-target growth

One of the most explicit signals that leaders are more willing to tolerate below-target growth is their mention of a neutral monetary policy stance in the statement issued after the Central Economic Work Conference earlier this month, Yao wrote. That policy stance has officially shifted from easy to neutral, and authorities are determined to contain asset bubbles and financial leverage, she wrote.

The People’s Bank of China has held its benchmark interest rate at a record low for more than a year. But it has allowed a steady increase in money market rates to squeeze leverage in the financial system, using reverse-repurchase operations to raise funding costs.

"In light of the trajectories of growth and inflation, it is indeed time for the PBOC to shift its stance to neutral," Yao wrote. "A neutral monetary policy stance does not necessarily mean policy rate normalization, while no policy rate hikes can still mean quite some tightening."

For this year, the government set a range of 6.5 percent to 7 percent for it’s economic growth target, slower than last year’s goal of about 7 percent. The world’s second-largest economy is on track to meet that 2016 goal after three straight quarters of 6.7 percent expansion.

— With assistance by Jeff Kearns

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