HONG KONG (Reuters Breakingviews) - Premier Li Keqiang broke the news during China’s annual parliamentary meeting on Friday morning: for the first time, there will be no annual growth target. This relieves local officials from making up for slumping demand and puts employment into focus where it should be. Good news for China, but mixed for trade partners.
The central government is conceding to reality. China’s modern economy is now far more complex, globally interconnected and indebted than it was during the global financial crisis of 2008. It is now experiencing its first recession since Mao Zedong’s Cultural Revolution wound down in 1976. That makes forecasting difficult. But Beijing’s GDP goals are not predictions, they are orders that tell officials how much output they need to generate, and a performance measure that can make or break careers.
Not this year. In the past, blind pursuit of GDP – an imperfect measure of economic health anyway – threw up empty megalopoli, underused factories, and inflated housing prices in some cities to the point where mortgage payments are starting to cannibalise consumption. The cost has been an estimated $1.5 trillion mound of duff loans, many of which are hidden off balance sheet, that are proving difficult for banks to digest as growth slows. China’s economic managers are signalling that deploying the same 2008 stimulus model is not going to work.
That doesn’t mean the government isn’t stimulating. Li said the budget deficit will hit at least 3.6% of GDP, up from 2.8% last year. The central government will also issue 1 trillion yuan ($140 billion) in special treasury bonds, plus amp local government spending. But the total is still restrained compared to other countries, at around 4.1% of output, according to Reuters calculations.
Less overcapacity is good news for foreign companies wary of a surge of Chinese enterprises dumping underpriced product abroad. There is now a renewed focus on holding down official unemployment to 6% - hopeful for those selling to local consumers. Trading partners, like Australia, hoping to sell commodities like iron ore into another construction spree may be less excited. But on balance, it’s progress, and hopefully permanent.
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