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China Debates Slashing Economic Growth Target Amid Virus Reality

Should Beijing drastically reduce its economic growth target or even abandon it altogether?

China Debates Slashing Economic Growth Target Amid Virus Reality
A pedestrian wearing a protective mask walks past as others sit on steps at a shopping area in Beijing. (Photographer: Giulia Marchi/Bloomberg)

(Bloomberg) --

The coronavirus shock has influential Chinese economists and officials engaging in a previously unimaginable debate: should Beijing drastically reduce its economic growth target or even abandon it altogether?

The goal for gross domestic product growth is usually announced at an annual gathering of the nation’s legislature in early March, guiding economic policy for the remainder of the year. That’s been delayed due to the virus lockdown and there’s still no date for the National People’s Congress, leaving economists and markets in the dark.

An ambitious goal of somewhere around 6% would suggest a flood of stimulus will be deployed, as advocated by some Chinese think tanks. A more realistic number in line with private analysts’ forecasts of around 3% would signal a continuation of the current targeted support measures.

China Debates Slashing Economic Growth Target Amid Virus Reality

Scrapping the target -- as recommended by central bank adviser Ma Jun -- would free policymakers to continue their quest to cut financial risk and debt growth.

“Setting a very high target could hold policy makers hostage and even force some to falsify economic data, while a flexible target may leave too much leeway to local governments,” said Liu Peiqian, an economist at Natwest Market in Singapore.

No Target

Given the devastating impact the coronavirus has had so far and the uncertainties ahead, some are suggesting scrapping any target for 2020.

People’s Bank of China policy adviser and former Deutsche Bank AG economist Ma Jun said a target of “around 6%” is very likely unachievable and will result in a flood of stimulus, which is not helpful in addressing short-term issues such as unemployment, state-run Economic Daily reported on March 31.

“Given the great uncertainty facing China’s economy, I suggest no longer setting a GDP target this year,” Ma said, according to the report.

Zhang Bin shares Ma’s view. Zhang, who’s the director of the Global Macroeconomics Institute at the state-affiliated think-tank the Chinese Academy of Social Sciences, said “I think this year’s focus will no longer be a specific number,” in an interview published on April 1 in local media Time News.

Lower Target

Last year, former central bank adviser Yu Yongding argued strongly that growth couldn’t be allowed to drop below 6%, but he has since softened that line. In an interview with Caixin published April 1, he said there is no need to be obstinate about 6% or 5.5%. Policy makers should work out a relatively appropriate target for the year after assessing the first quarter, he said.

Some other economists, including Macquarie Group Ltd’s Larry Hu and Li Xunlei, the vice chairman of the China Chief Economist Forum, also think China will set a target that is much lower than “around 6%,” although they didn’t set a specific figure.

A target of around 3% would be more in line with the consensus forecast for this year, and that would be fast enough to offset shocks to employment but wouldn’t run the risk of the economy overheating, some economists say.

China Finance 40 Forum, a Beijing-based think tank that includes PBOC Deputy Governor Chen Yulu, suggests this year’s growth target be lowered to “around 3%.”

“Looking at the long term, a growth target that is too high might lead to distortions in economic structures and worsening of resources allocation,” they wrote on their website. “What’s more, it might exacerbate the problem of structural imbalances in the mid to long-run, hurting long-term growth as a result.”

Sticking to 6%

A target of 6% would be enough to fulfill the Communist Party’s long-term promise to double gross domestic product and average income by this year from 2010’s levels. But that would require a significant increase of stimulus measures from the current subdued pace, and risks bringing about yet higher debt and financial instability.

However, some economists and influential figures are still holding to that goal.

“I firmly believe China can still achieve the goal of growing its GDP by 6% this year,” former vice commerce minister Wei Jianguo wrote in a column in mid-March, arguing that the fundamentals of the economy are unchanged despite the shocks from the coronavirus.

His view was echoed by Feng Xuming, a senior fellow of the National Academy of Economic Strategy at CASS, who argued China should stick to a target of “around 6%”. “It’s not necessary and it’s inadvisable” to lower the target, he wrote in a column for Sina Finance. “This year’s economic growth target has great and far-reaching significance. We shouldn’t give up on it easily.”

China’s top policy makers have recently reaffirmed their commitment to achieve the full-year economic and social targets this year, although they haven’t specified what that means. The leaders of the Communist Party also vowed to “make sure to accomplish the task of building a comprehensively well-off society” at a Politburo meeting on March 27.

Some interpreted that as a strong signal that Beijing still wants to attain the targets of doubling income and GDP, and thus an indication that strong stimulus is on its way. That camp includes private economists led by Guan Qingyou and Deng Haiqing.

“The central government will step up counter-cyclical adjustments, hedge against economic impact from the coronavirus and minimize the losses caused by the pandemic,” Deng and another analyst wrote in a post on the Reality Institute of Advanced Finance’s Wechat account.

©2020 Bloomberg L.P.

With assistance from Bloomberg