China will struggle to reach GDP targets till 2020: analysts

Beijing

CHINA'S 6.5 per cent annual economic growth target for five years to 2020 will be difficult to achieve unless Beijing trades reform for growth or polishes its data, analysts say.

Over the weekend during his annual work report delivered to Parliament, Premier Li Keqiang - as expected - set a GDP growth target of 6.5-7 per cent for 2016.

During his speech to the 3,000 or so delegates gathered in Beijing, he also laid out the main guidelines for the next five-year plan through to 2020, to be approved during the National People's Congress (NPC).

The plan is based on an average annual growth of 6.5 per cent which is needed to double per capita income by 2020 over 2010 - one of the Communist Party's key goals.

"Our goal is that by 2020, advanced manufacturing, modern services, and strategic emerging industries as a proportion of GDP will have risen significantly," Mr Li said last Saturday, all the while conceding that many challenges lie ahead for the world's second largest economy.

"China will face more and tougher problems and challenges in its development this year, so we must be fully prepared to fight a difficult battle," he said. "Downward pressure on the economy is growing," he added.

Stability is still Beijing's core concern, but in the long run challenging growth targets could cause further disruptions in the economy already struggling with record levels of corporate debt and growing overcapacity throughout its industrial chain, analysts warn.

"Very high unrealistic expectations of China and its growth can lead to self-fulfilling disappointments and, in the extreme, even crises - as we have seen occur in developing countries in the 1980s, 1990s and (2000s)," Credit Suisse analysts wrote in a recent report.

Today, as China's growth slows, many are questioning the reliability of statistics published by Beijing. This puts pressure on the provinces to achieve the growth targets while advocating reform, which in the near term means cutting jobs and sacrificing GDP.

"The economy will almost certainly not grow at anything close to these rates this year or over the medium term. Few now believe China's economy is growing at the rates shown by the official figures," said Mark Williams of Capital Economics.

"But publishing a GDP growth figure that undershoots the targets by any significant amount would be politically difficult. As a result, the statistics bureau will remain under pressure to overstate the pace at which the economy is growing," he added.

Officially, China's economy expanded by 6.9 per cent in 2015. While that is the lowest figure published in 25 years, most inside and outside the country believe that figure is overstated.

Analysts say China should scrap the target altogether, and Beijing should focus more on quality of life and solving social issues.

But China's leaders are reluctant to let go of a growth target, which in their view gives legitimacy to their one-party rule.

China's other option to reach its targets is to prop up growth by loosening credit conditions and piling on even more debt on state-owned companies and local governments. But that will exacerbate imbalances and delay reform. This option is already underway.

Credit lending was above target and increased 13.5 per cent in 2015. In January alone, bank lending grew by 2.51 trillion yuan (S$529 billion), the biggest monthly figure on record.

Last week, Moody's Investors Service downgraded the outlook for Chinese sovereign debt, questioning the government's ability to enact reforms.

Despite Beijing's repeated calls for reform which should address overcapacity and inefficient capital allocation, on-the-ground restructuring has been slow, with state-owned firms resistant to change and local government reliant on tax returns to reach their growth targets.

"China has not followed through on the attempts it has made over the last decade to address overcapacity," said Joerg Wuttke, president of the European Chamber of Commerce, earlier this month. "This has led to a further deterioration of the problem. Without a sustained effort to address it now, overcapacity may well seriously impede the effectiveness of China's economic reform agenda.

"Fundamental changes have not yet taken place. Tackling overcapacity is now more urgent than ever. The cost of maintaining the status quo is far too high," he added.

To reach its goal of GDP growth of 6.5-7 per cent for 2016, Mr Li said that the fiscal deficit would rise to 3 per cent of GDP in 2016 against 2.3 per cent last year. Many analysts had hoped the figure could rise to 4 or 5 per cent, as a bigger deficit could help spur demand and shift funds to ailing industries in the steel and cement sectors as well as aid in restructuring.

A positive sign of the shift away from investment-led growth is that the fixed-investment target has fallen to 10.5 per cent from a previous target of 15 per cent. Much of that will go into developing railways.

Mr Li also announced that Beijing increased its growth target for M2 (the broadest measure of money supply) to about 13 per cent - up from last year's 12 per cent goal.

"It is intrinsically difficult to consolidate production capacity while carrying out stimulus," said Mizuho Securities Asia Ltd economist Jianguang Shen in a recent research note. "We believe the top priority of the policymakers has turned to growth," he added.