China is again moving gradually to accept that the pace of growth has slowed in the world’s second-biggest economy.
At the fourth session of the 12th National Peoples Congress (NPC) on the weekend, China downgraded the growth outlook to a range of 6.5-7.0% from last year’s target of around 7%.
That’s not a significant step down from this year’s target but rather what China’s Xinhua news agency called a softening, of GDP targets for the year ahead.
Importantly though, Xinhua says that the forecast range is a signal to officials throughout China that the point forecast is no longer the appropriate measure of reform. The underlying implication appears to be that there will be less tolerance for fabricated growth, and other data.
Here’s Xinhua (our emphasis):
By setting the GDP growth target in 2016 at a range from 6.5 to 7 percent instead of a specific figure, the Chinese government has applied more flexibility in economic management, making room for structural reform to realize long-term growth.
It is the first time China has offered an annual growth target range in two decades, and the change itself is remarkable. For the past three decades, the Chinese economy has enjoyed enviable rapid growth, and the pace of which often surpassed official GDP targets.
No countries could sustain such fast growth forever, especially for an economy as large and complicated as China’s. Obsession with a high GDP growth target could delay the inevitable transition to a more sustainable model.
By setting a flexible GDP target, the central government has sent a strong signal to local officials that the figure alone is not what they should strive to seek. To steer the economy onto a more sustainable path, a more dynamic evaluation system, including environmental standards for local governments, should be established.
That’s not to say the new target range is no longer relevant, Xinhua said.
Rather “the floor of 6.5 percent is a guideline for the minimum rate of growth needed in the coming five years to meet the goal of doubling GDP and per capita income from 2010 to 2020,” it said.
Equally however, in moving to a growth target band China appears to be giving itself, and no doubt hoping markets, more tolerance around achieving outcomes so that reform of the economy can continue.
As if to underline the point, the FT quotes Premier Li Keqiang who said, “pursuing development is like sailing against the current: you either forge ahead or drift downstream.” He also said the government must “ensure that China’s economy, like a gigantic ship, breaks the waves and goes the distance.”
Li’s eye is firmly on the development ball as a cure-all for what’s currently ailing the Chinese economy.
“Development is of primary importance to China and is the key to solving every problem we face. We must take particular care to avoid falling into the ‘middle-income trap,’ and we need to address an increasing number of problems and risks,” Li said.
Those risks, according to Xinhua, are far from insurmountable.
“Achieving the minimum 6.5 percent growth should not be hard for a country with ample policy tools. Interest rates are still high compared with those in many developed countries, suggesting room for more monetary stimulus if necessary. Fiscal policies have yet to play a greater role, with the deficit ratio ready to expand,” it said.