Time To Throw In The Towel? China Hints At Lower Growth

In “not very exciting but nonetheless important” news, PBoC adviser Huang Yiping has gone on record suggesting that Beijing adopt a “more flexible” GDP target range in the new year.

Although no one with any sense believes that China is growing at anywhere near a 6.5% clip, the Politburo has its story and they’ve generally stuck to it. Still, there’s mounting pressure on the powers that be to take a more realistic approach when it comes to setting expectations.

One argument for lowering the growth target is that it will take pressure off the central bank when it comes to walking the veritable tight rope between preserving growth and reining in speculative excess. Here’s how I put it earlier this week:

As complicated as the situation is, it really all comes down to one very simple problem: China needs to deleverage and releverage at the same time.

Obviously that’s impossible, so the PBoC is doing the next best thing – they’re shifting the focus back and forth between growth and stability depending on where the most problems are at any given time.

That juggling act is becoming more difficult seemingly by the day and will ultimately prove to be impossible over the medium to long term.

As Bloomberg notes, President Xi “is open to growth below the 6.5 percent target due to rising debt and concern about an uncertain global environment after Donald Trump’s U.S. election win.”

“Hitting the target isn’t needed if doing so is too risky,” a source said.

And so, slowly but surely China is losing the battle to keep all of the plates spinning. It’s only a matter of time before the ultimate concession is made and Beijing moves to free float the RMB. If Trump starts a trade war, that could come as early as this year.

Meanwhile, a hat tip to SocGen for what looks like a prescient call. Here’s what the bank said just a few days ago:

The lack of credit deceleration so far points to a turn of the growth and inflation cycle in mid-2017 – one quarter later than we initially expected. But the cycle will turn nonetheless. The monetary policy stance has officially shifted from easy to neutral, and the authorities are sounding determined to contain asset bubbles and financial leverage. There have even been a few signals pointing to the potential acceptance of a growth rate below 6.5%. While we find the tone encouraging, the true test of this willingness will only come when economic growth starts to decelerate again in 2H17.

We think that the arbitrary growth target will be given up – if not in 2017, then definitely in 2018. The harm of keeping it is all too apparent, for it has become not only an impediment to the necessary structural adjustments but also a culprit behind rapidly rising debt risk.

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One thought on “Time To Throw In The Towel? China Hints At Lower Growth

  1. It has to be borne in mind that as the Chinese economy makes the transition to the service industry, it will become increasingly difficult to measure GDP growth. All one has to do is look at Italy, where the “black economy” has traditionally been about 20% of GDP. This is an estimate -:)

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