THE slowest expansion in almost four decades isn’t usually the sort of thing that leaders are comfortable foreshadowing.
For all the strain China’s development model is now exhibiting, the worst projections since 1991 don’t spell disaster.
But they will take hard work to achieve.
The economy is contending with powerful forces holding it back: A sluggish recovery from a property slump and sub-par consumer spending – not to mention a battle with deflation.
Shipments abroad are one of the few areas really thriving.
And then there is the potential impact from a spike in energy prices resulting from the United States and Israeli attack on Iran and Tehran’s retaliation.
While it may slow the global economy on which China’s export machine depends, it might also help crank up inflation.
That’s a goal that has eluded officials recently and to which they have pledged new fealty.
Sessions of the National People’s Congress (NPC), the nation’s top legislature, are closely watched by businesses and investors because despite the high degree of choreography, it provides insight into the intentions and aversions of President Xi Jinping’s team.
Few items garner as much attention as the aspiration for gross domestic product (GDP); the government announced an increase of 4.5% to 5% as its goal for 2026.
That’s after a couple of years aiming for around 5% – and getting there. (In 2020, China declined to make a forecast, owing to the pandemic).
While the new target is far from the scorching advances notched after China joined the World Trade Organisation in 2001, it’s an acknowledgement that times will be tougher.
Beijing is allowing for an undershoot. And it puts the onus on officials to prevent a more pronounced slackening.
Fiscal policy will take a leading role without being excessively loose.
The budget deficit will be in the vicinity of a record 4% of GDP, according to Finance Ministry documents.
That’s consistent with the the past few years when China did just enough to hit the target and little more.
There’s a persistent aversion in Beijing to opening the floodgates, a relic from the 2007 to 2009 Global Financial Crisis when a huge stimulus was unleashed.
The step staved off a a slump at home and mitigated the downturn abroad, but left a big debt overhang.
Encouragingly, China now seems very alert to the threat of deflation. Languishing prices are a major challenge and point to dour conditions at home while orders to customers overseas surge.
Premier Li Qiang said the government will steer the cost of living “back into positive territory.”
That’s tougher language than last year when he called for an “appropriate range” for inflation.
The shift is a welcome recognition that Beijing has a problem.
Consumer price gains have been hovering around zero and their factory gate equivalent marked the 39th monthly decline in December.
Turning this around can’t be done without monetary policy.
The People’s Bank of China (PBoC) has been timid in addressing this danger compared with how seriously Western counterparts have taken deflation in the past.
Private-sector forecasts for interest rate cuts have repeatedly come to grief.
The PBoC eased only once last year, a mere 10 basis point reduction.
Meeting Li’s objective on a consistent basis is going to need a much less parsimonious response.
One hinderance is that China doesn’t have a formal inflation target like the Federal Reserve, the Bank of Japan or the European Central Bank.
There is no statutory requirement for the Chinese central bank to gear policy toward any particular numerical level over the years.
And it certainly doesn’t have the independence that, in theory, allows policymakers to do whatever it takes.
The Middle East conflict may even come to China’s aid. A prolonged climb in energy costs might help push inflation up.
Authorities might not like the cause – a conflagration rather than a sign of dynamism at home – but it could become a useful assist.
The NPC sessions devoted to economics have been depicted as heralding a low-growth era.
That period probably began some time ago. Many economists outside China are sceptical of official numbers.
Li’s predecessor fuelled the cynicism when he called GDP reports “man-made”.
How about an era of higher inflation? Not runaway, but enough to get key indexes off zero.
Pity the economy isn’t so easily scripted as a session of cadres. — Bloomberg
Daniel Moss is a Bloomberg Opinion columnist. The views expressed here are the writer’s own.
