The Chinese Premier Wen surprised everyone a bit when his annual government report included a 7.5% GDP growth target for 2012 and 7% for the "5-year plan". After all this number has always been the "lucky 8". His goal however is to attempt a shift away from the export-led expansion and move toward a more sustainable growth path. In order to achieve this, the economy will need to be restructured to increase domestic consumption. It is not at all clear this can be accomplished using central planning, particularly when China's exporters still have a substantial pull over many regional and even central bureaucrats and politicians.
To get to their goal of a more sustainable growth, the authorities want to focus on containing unemployment by trying to create new jobs (9 million targeted this year), maintaining household income growth (both urban and rural), and creating more affordable housing (7 million new units this year). At the same time they want to maintain 10% growth in exports. These are ambitions goals and a somewhat new fiscal policy direction that is likely to have some unexpected knock on effects on the GDP growth. It is viewed as "growth-friendly" but may involve increasing the budged deficits and raising new government debt (centrally and regionally) in order to fund the new programs.
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| Source: JPMorgan |
The risk of missing the GDP target (a number watched closely around the world) because of these new policies is not acceptable - it would cost a few people their jobs and possibly their careers. The Party officials would therefore rather understate the forecast than overstate it. After all, the GDP has come in above target since the late 90s.
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| Source: JPMorgan |
That means they view the 7-7.5% China's GDP growth as achievable. If the plan is not working, the authorities have other tools in that "growth toolbox". In addition to the fiscal policy changes that the markets have been focused on today, there are also monetary goals that the PBoC wants to reach. The monetary authorities will be targeting 14% growth in the M2 broad money stock. That measure has been declining since reaching its peak of close to 30% in 2009. This could potentially involve adding liquidity to the banking system.
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| China's M2 money stock growth rate (Bloomberg) |
So the stimulus from China is alive and well but it's taking different forms going forward, including targeting the money supply growth. The authorities there have tremendous resources (such as selling more government debt) in order to avoid a hard landing and meet the now less ambitious growth targets. But China's export dependence should be difficult to reduce and will continue to present risks arising from economic disruptions elsewhere in the world.
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