China sticks to growth forecast; targets pollution, corruption

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China is holding fast to its expectations of moderate GDP growth, as Beijing struggles to maintain the country's economic expansion in the face of fiscal, social and environmental threats to its prosperity.

On Wednesday, amid the grandeur of the cavernous Great Hall of the People, premier Li Keqiang offered his "report on the work of the government," the annual Chinese address that defines how its leadership envisions the year ahead.

The most important elements of that vision suggest a country dedicated to preserving the status quo despite rising problems, in what one critic called a "mission impossible." China is forecasting economic growth of "about 7.5 per cent" – unchanged, to the word, from last year – and budgeted a 12.2-per-cent expansion in military spending, up slightly from the previous year, but in line with a two-decade streak of hefty defence increases.

At the same time, Beijing pledged renewed efforts to crack down on pollution, over-capacity and official corruption. Mr. Li said the coming year will see the closure of 50,000 small coal-fired furnaces, sweeping efforts to scrub dust, sulphur and nitrogen oxides from coal-fired power plants, and the removal from roads of six-million "old high-emission vehicles." The heavy smog, dirty water and toxic agricultural soil poisoning China's people and fields are "nature's red-light warning against the model of inefficient and blind development," Mr. Li said.

But sorting out those issues, while at the same time pursuing muscular growth, all "seems to us almost like a mission impossible," said Wei Yao, an economist with Societe General based in Hong Kong.

Mr. Li "talked about fighting pollution – a symptom of the old model – while at the same time wanting the same amount of growth the old model delivers. So how can you square that?" Ms. Yao said.

Beijing may have been better to temper growth expectations, she said, particularly since investors are far more worried about China's enormous accumulation of debt.

Last year, official statistics placed Chinese growth at 7.7 per cent, although skeptics suggest an increasingly large portion is on the back of stimulative spending. The underlying economy, they warn, is far less steady. It now takes between $3 and $4 of new lending to generate $1 in GDP growth, a growth of several-fold from just a few years ago.

Mr. Li acknowledged that "the foundation for sustaining steady economic growth is not yet firm, and the internal impetus driving growth needs to be increased." There are "risks and hidden dangers" in the banking sector, a heavy burden of excess capacity in some industries, and "severe" pollution of air, water and soil in some places, he said.

But, he said, "development remains the key to solving all our country's problems." He offered little in the way of tangible measures to fight the rising debt-load or restructure the economy, outside repeating earlier promises to introduce deposit insurance. He made the case for more foreign investment in China's banking, oil, electricity, railway, telecommunications, and utilities industries. China will also allow greater latitude in trading of the renminbi, including a move "toward renminbi convertibility under capital accounts," Mr. Li said.

But the lack of specific ideas and specific timelines "puts the nail in the coffin of this idea that there's reform coming," said Anne Stevenson Yang, research director at J Capital Research in Beijing. "Because there's a contradiction between having a GDP growth target and deleveraging. … When you set a growth target, you set yourself up for more non-performing loans, which is exactly what they're doing."

Ms. Yang dismissed, too, the import of more outside money flowing into sectors like banking and oil that have traditionally been the purview of state-owned enterprises: "If it's about attracting more capital, it's not reform."

Conversely, Beijing may have no choice but to keep its economy aflame in order to push the changes it wants past officials suddenly bereft of lavish state-funded banquets. "You need a certain level of growth to implement reforms, because reforms are intrinsically quite painful for corporates and big parts of the bureaucracy," said Stephen Green, who leads the Greater China research team for Standard Chartered Bank.

Still, the Chinese premier's speech suggests the leadership of the world's most populous country is increasingly being diverted from the GDP mantra that has been its singular obsession for 30 years. Mr. Li spoke at length about pollution and graft, saying that last year saw a 35 per cent reduction in government spending on overseas visits, official vehicles and official hospitality. In the year ahead, that number is to fall further, and Beijing has imposed a ban on building or renovating government buildings. More changes are also in store for rules on use of government cars, Mr. Li said.

Beijing is proposing to hand central authority to lower levels of government in some instances, promising "a revolution the government imposes on itself." And, in the wake of a terrorist knife attack that killed 29 and cast a harsh new light on China's treatment of minorities, Mr. Li called ethnic groups "equal members of the Chinese nation," saying the country will "protect and develop" their cultural traditions.

In short, China is changing. "Economic growth is no longer a defining feature of the China story," said Damien Ma, a fellow at the Paulson Institute who recently co-authored a book, "In Line Behind a Billion People," that explores that theme.

"Instead," he said, "sociopolitical challenges will consume the Chinese government over the next decade."