China’s economy, as usual, defied the economic doomsayers in 2016.
After roiling markets earlier in the year, leading to some bone-jarring market declines in the process, economic activity picked up as the year wore on. And with it, investor optimism.
With a little over a week until the nation’s Q4 GDP report is released, it now appears to be a case of by how much, rather than whether, policymakers managed to achieve their 2016 growth target of between 6.5% to 7% set in March last year.
Multi-year peaks for both manufacturing and services purchasing managers indices in December all but assure that target has been met, with the economy seemingly accelerating into 2017, a stark contrast to what was seen at the beginning of last year.
However, in order to achieve that outcome, policymakers decided to use China’s old growth levers — debt and state-backed infrastructure investment, along with a loosening of housing market restrictions — in order to stabilise growth, an outcome that echoed back to the era immediately following the global financial crisis.
That led to a swathe of undesirable economic side effects in the years that followed, and, according to new reports, there’s renewed concern that the steps taken to stabilise growth last year may lead to even further problems in the period ahead.
According to Bloomberg, in a meeting of China’s top brass held during December, the cost of China’s debt-fuelled reflation was deemed to be too high.
“The buildup of debt used to fuel smokestack industries from steel to cement had helped win the short-term battle for growth, but the triumph itself undermined the foundations of long-term expansion,” one source told Bloomberg.
“What followed was an order to central and local government officials that if they are forced to choose this year, stability must be the priority while everything else, including the growth target and economic reform, is secondary,” said another source present at the meeting.
According to the contacts, the leaders reached an understanding to be flexible over targeting a doubling in per capita gross domestic product in the decade to 2020, and also a 6.5% annual growth target out to 2020.
“They agreed it would be acceptable if the goal to double per capita GDP by 2020 — first conceived by former leader Deng Xiaoping and endorsed by all three presidents since — slipped by two or even three years,” one person told Bloomberg.
If correct, that suggests the debt-fuelled growth seen in 2016 may not be repeated in the year ahead, creating downside risks to the nation’s next growth target, expected to be announced in March.
While a lower growth target may have implications on commodity demand and, courtesy of China’s sheer economic size, the outlook for global economic activity, such an outcome will likely be welcomed by those concerned about China’s rapid debt accumulation since the global financial crisis, including the Reserve Bank of Australia.
Speaking in September last year, RBA governor Philip Lowe suggested that Chinese policymakers faced a difficult trade-off when it came to balancing the risks between near-term economic growth and longer-term financial stability.
Another area [to watch very closely] … is the unfolding transition in [China, which] … is also dealing with the consequences of a large build-up of debt in the private and state-owned business sectors. … [To date] there has not been a major interruption to growth … partly because the economy is still being supported through fiscal policy, including expenditure on infrastructure. The Chinese authorities face a difficult trade-off. Measures to address industrial overcapacity and the very high levels of debt in parts of the economy are necessary over the longer term but they are not helpful for growth in the short run. It remains a work in progress, and we all have a strong interest in their managing this trade-off as smoothly as they can.
The warning from Lowe echoed similar remarks in August from former RBA governor, Glenn Stevens, in which he pondered the question “whether those excesses can be gently landed without a crash?”
“The Chinese authorities are very conscious of that. It’s not as though they don’t realise the various risks that are there. They do. But it’s quite a tall order to kind of bring all this back down to earth gently,” Stevens said.
The Chinese government looks set to release the nation’s Q4 GDP report, including full-year economic growth, on January 20.
According to Li-Gang Liu, Xiaowen Jin and Kelvin Ho-Por Lam, Citibank’s emerging markets Asia economics team, full-year growth is likely to come in at 6.7%, almost smack-bang in the centre of the government’s 6.5% to 7.0% target.
It would also be below the 6.9% growth level reported in 2015.
Should the reports that financial stability will take a more prominent role than actual growth prove to be correct, it suggests that figure could be even lower for the year ahead.
China’s 2017 GDP growth target will likely be announced at the National People’s Congress in March.
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