SOC GEN: China is likely to lower its growth target -- but there may be even bigger news

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China’s ruling political elite, the 205 members of the Communist Party’s central committee, are scheduled to meet in the weeks ahead as part of the fifth plenum of the 18th communist party congress.

The plenum, an annual gathering of central committee, will attract more attention than usual on this occasion given its close proximity to the announcement of the 13th five-year plan for the nation, something that will outline a number of policy targets, both binding and non-binding, covering economic and social goals.

Given China is now home to the second largest economy in the world, sitting only behind the United States, markets will be watching developments closely, particularly the revised economic growth target for the next five years, something that officials have been able to hit with unnerving regularity.

According to Wei Yao, China economist at Societe Generale, the official growth rate is likely to be lowered.

“We think it is likely to be lowered from 7% to 6.5%,” she wrote in a research note released over the weekend.

“In our view, in order to continue the reforms will require substantial sacrifice of short term growth and higher tolerance of volatility of all sorts. An unchanged growth target (currently 7%) would leave little scope for further liberalisation, the implication of which is to loosen up on controls over, among other things, the financial system and the corporate sector.”

While Wei suggests that most market attention will be squarely fixated on the target growth rate, she suggests that there may be other announcements from the plenum that will be of greater importance. In particular she will be interested to hear more detail on reforms to state-owned enterprises announced last month.

“The SOE reform guidelines revealed in September is a start, but they fell short in addressing two main issues,” notes Wei.

First, SOEs’ corporate governance can only be improved if they are subject to competition and run by professionals. The guidelines’ emphasis on strengthening the communist party’s control over SOEs seems to run counter to the idea,” she wrote.

“Second, it is not clear how the government will resolve the issue of zombie SOEs and their debt. The guidelines from the central government, the plans from provinces, and the trials so far have all focused on making giant SOEs even bigger, with little mention of any consolidation or restructuring of other smaller SOEs. But it is these SOEs that are forming the excess capacity, generating deflationary pressure and weighing on bank balance sheets. We can see that employment is one key concern, but the cost of keeping inefficient SOEs will be much more dearly.”

Wei hopes that the plenum may outline how the government intends to proceed with SOE reforms, something that she believes the government needs to address given weakening productivity growth and the increased probability of a “lost decade” scenario for China’s economy forming.

Chinese September quarter GDP will be released by the Chinese government on October 19. Regardless of what is announced from the fifth plenum, Wei suggests the government will do “just enough” to hit its 7% growth target for this year. In the June quarter China’s economy expanded by 7% from a year earlier, unchanged from the pace recorded in the March quarter.

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