This is why it's a good thing if China downgrades its economic growth target

Photo by Phil Walter/Getty Images

While market attention today is dominated by the People’s Bank of China (PBoC) decision to ease monetary policy on Friday, another event, beginning in China today, is perhaps significantly more important – the Communist Party’s (CPC) four-day fifth plenary meeting in Beijing.

The event will see China’s central committee – a body comprising 376 of the nation’s most powerful communist party figures – discuss the CPC’s 13th five-year plan, something that outlines the economic and social agenda for the nation over the next five years.

“The 13th Five-year plan will play an important role in laying out the policy framework for the new growth targets,” wrote Xiaoping Ma, Jing Li and Hongbin Qu, economists at HSBC, in preview note last week.

“The full details will not be released until the plan is approved by the National People’s Congress early next year. We expect the highlights to include a lower growth target, comprehensive reform plans and a detailed timeline for implementation.”

The trio suggest that in order to double China’s per-capita GDP level from the 2010 level of 30,567 yuan, a stated goal of China’s National Development Reform Commission (NDRC), the country’s top planning agency, the government will need to target a minimum growth rate of 6.5% between 2016 to 2020.

While an amazing rate if realised, something that will see China’s economy double in just 10 years, an expected downward revision to the economic growth target has some in the markets worried, particularly given the negative impact the existing slowdown has had on economic activity in Asia over the course of 2015.

While the CPC has consistently underpromised and overdelivered when it has come to its previous five-year growth forecasts, shown in the chart above, Ma, Li and Qu believe the upcoming target will different.

“In previous five-year plans, growth rates were consistently higher than the projected target,” the trio wrote.

“For example, for the 12th Five-year plan ending this year, real GDP growth rate averaged 7.8%, ahead of the 7% target. We think this will change. This time, we see 6.5% as the bottom line for the GDP growth rate. This reflects the fact that policy makers’ are focusing more on a balance between the quality of growth and the implementation of reforms.”

While that may provide discomfort for the global economy, particularly Asia, over the short term, the government’s push to bolster sustainable forms of growth, rather than growth at any cost, should be seen as a welcome development for the global economy over the longer term.

While there are risks associated with China’s current economic transition, markets need to ask themselves what they would rather see: a return to the old ways of implementing unsustainable infrastructure spending to bolster growth ,or one that encourages more sustainable growth drivers, such as consumption and services.

Given concerns surrounding overcapacity and indebtedness in China’s industrial sector, the traditional driver for economic growth in recent decades, clearly an alternate, and sustainable, way to drive growth moving forward is now required.

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