One of the big stories of the day is the 2% rally in China, which was spurred by comments from Premier Li Keqiang about a “bottom line” or a “floor” for GDP growth that would not be violated.
In other words, leadership is concerned about the slowing, and will seek to avoid a “hard landing.”
In a research note, BofA/ML analyst Ting Lu dives deep into the premier’s comments to ascertain what, exactly, is the economic goal of Chinese policy.
7.5% is the growth floor for 2013
For 2013, Mr. Li made it very clear that the growth floor is 7.5% and inflation cap is 3.5%. He is committed to delivering the 7.5% growth target while containing CPI inflation at below 3.5%. Mr. Li sees the falling trend of growth and he sets an average 7.0% growth floor for 2013-20. We reckon that Mr. Li might set 7.0% as growth floor (also target) and 4.0% as inflation cap for 2014. The transcript fully confirmed our out-of-consensus calls in “Li Keqiang Put” (12 July) in which we argued that Mr. Li’s growth floor is 7.5% for 2013. As many Street economists had thought that the growth floor was 7.0% for 2H13, the markets could underestimate Mr. Li’s determination, policy measures and growth prospects in 2H13.
Restructuring to stabilise growth, a small fiscal expansion
On policy, Mr. Li recognises that growth is approaching the 7.5% floor at the moment, but he sees no room on monetary easing and he will use supply-side measures to bolster growth without worsening existing structural problems. But from his policy details we reckon that he could introduce a small scale fiscal expansion by tapping the central government coffer to support social housing, railway, environment related urban infrastructure such as sewage and IT infrastructure such as broadband and 4G.
The whole framework can basically be summarized in this chart, which shows the Chinese “Philips Curve”, a classic concept in economics which indicates that there’s a tradeoff between fast growth and hot inflation.
The shaded area in the middle is where China will be aiming.
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.