In a year of “tortuous” global economic recovery, China’s policy makers are steeling themselves for falling exports, slowing growth and a continuing fight to rein in inflation.
But with China’s GDP growth target lowered to 7.5 per cent from 8, the year ahead seems likely to bring more policy tinkering in the world’s second-largest economy, rather than any major new stimulus program as in the last financial crisis.
“We are keenly aware that China still faces many difficulties and challenges in economic and social development. Internationally, the road to global economic recovery will be tortuous, the global financial crisis is still evolving, and some countries will find it hard to ease the sovereign debt crisis any time soon,” Chinese Premier Wen Jiabao said in a two-hour address to the opening of the National People’s Congress on Monday, the appointed body of nearly 3,000 delegates that serves as China’s legislature.
The new target of 7.5 per cent is the first dip below 8 per cent since 2004, and demonstrates both a shift from China’s need for growth at all costs and its changing labour market.
Though the country has seen social unrest in the past year over rising costs and unpaid wages, there are also labour shortages among factories in southern cities, leading to higher wages and improved working conditions. China’s aging population, exacerbated by the 30-year-old one-child policy, is also resulting in a tighter labour market.
“Even a few months ago, the prevailing wisdom was the growth rate has to be 8 per cent or above to keep unemployment from rising. So the idea of GDP growth at 7.5 per cent means unemployment isn’t going to be as great as feared,” said Li Wei, an economics professor with Beijing’s Cheung Kong Graduate School of Business. “With the demographic changes, growth is going to naturally go down, If you continue to push for 8 per cent or above growth, you’re going to get into a deeper problem.”
In this opaque governing system, Mr. Wen’s government work report is often the best indicator of China’s economic and political path for the coming year. It appears this year’s path will focus heavily on domestic goals including encouraging household spending, continuing financial reforms and maintaining as well as possible both exports and imports. China’s international role received limited mention and the plight of debt-ridden Europe was not mentioned.
“Domestically it has become more urgent but also more difficult to solve institutional and structural problems and alleviate the problem of unbalanced, unco-ordinated and unsustainable development. In addition, China’s economy is encountering new problems,” the Premier said. “We must … take more effective steps to resolve these problems.”
Yet there was little in his speech to indicate strong action. Policy makers are instructed to keep inflation to 4 per cent; debt crises that have hit many cities were dismissed as under control; and the currency exchange rate is to be kept “basically stable,” though with more work toward making the yuan a convertible currency and expanding its use in international trade and investment.
In a reminder that the Chinese economy is still heavily government managed, Mr. Wen spoke of the need for government to support development in some areas while limiting other areas of growth, and of strengthening the role of government investment. The latter policy has been criticized for creating short-term jobs but nothing for long-term economic growth (for example, high-end shopping malls that attract no shoppers, and city blocks of luxury apartments with few residents).
“We should not expect any major policy stimulus or liquidity easing even as export growth slows. The work report also indicated [a]continued gradualist approach to adjusting economic structure and key reforms. In line with our expectation, the government projects a faster growth in fixed investment than in consumption for 2012,” wrote China economist Wang Tao at UBS.
“Growth stability remains Beijing’s top priority. China commits itself to more efforts to stimulate consumer consumption, improve social welfare, support small companies and ease market access for private investment,” wrote Sun Junwei and Qu Hongbin, economists at HSBC. “But given a bigger fiscal deficit and more steps toward monetary easing, we expect the GDP growth to hold up well at around 8.6 per cent this year.”
This year’s government deficit is projected at 800 billion yuan ($126-billion), a decrease to about 1.5 per cent of GDP, indicating no new major stimulus is planned.
“All the things they discussed are in line with the things they’ve talked about in recent months,” said Janet Zhang, an economist with the GK Dragonomics research firm in Beijing. “All those things are not a surprise to me.”
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