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Official growth target 2017: Lower would be better

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All told, today’s fourth quarter 2016 economic data contained few surprises. Peering ahead is more interesting. Given only subdued growth in world trade, the government’s ambitious self-imposed growth targets can only be achieved with the help of a hefty fiscal stimulus and with loans. How long this can work is questionable.

Allianz SE
Munich, Jan 20, 2017

As China’s National Bureau of Statistics announced today, fourth quarter 2016 growth of 6.8% was up slightly on the preceding three quarters (+6.7% year-on-year in each case). This means that in 2016 as a whole real output grew by 6.7%. The government had set a growth target between 6.5% and 7%.

Without public investment projects and a pronounced rise in lending it would not have been possible to achieve this growth target, especially given that world trade more or less stagnated. State-owned enterprises ramped up investment last year by almost 19%, whereas private sector investment activity increased by only around 3%.

In the course of last year Chinese economic policy focused increasingly on short-term economic stimulation and less on the urgently needed structural reforms. The upshot is that the macroeconomic imbalances, such as towering corporate debt and rocketing real estate prices, are building up further. For the short-term economic outlook this might be less problematic, but in the medium to long-term these imbalances fuel uncertainty and are a major negative factor.

In our view, the government’s self-imposed annual growth targets are one reason behind last year’s expansionary fiscal policy. With such ambitious targets, the government puts itself under massive pressure. The Chinese public has grown accustomed to these targets over many years, so abandoning them completely might prompt considerable uncertainty in the economy. But we think it would make sense to trim the annual targets more swiftly. This would ease the pressure on economic policy to take countermeasures every time softer economic data are published. And the government would also signal that weaker growth is “ok” and will be tolerated. And, not least, economic policy could then again focus on pressing ahead with reforms.

The Chinese government’s growth target for this year will probably be announced in March. Much suggests that it is likely to be around 6.5%. A lower figure would come as a positive surprise for us. Our own forecast for real GDP growth this year stands at 6.3%.

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