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Policies show focus on stable economy

By Shen Jianguang | China Daily Europe | Updated: 2016-03-13 13:09

To accomplish this target, the government seems to have decided to adopt expansionary money and fiscal policy

The Chinese government has set this year's GDP growth target at 6.5 to 7 percent. Although lower than last year, it sends a strong signal to the market that the government is resolved to stabilizing the economy. In fact, Premier Li Keqiang said one of the reasons it has set this target is to guide market expectations.

We note that growth of several economic indicators was actually lower than expected last year. For example, China's trade growth has been lower than its official target for four years. Although the National Development and Reform Commission expected growth in fixed-asset investment and retail sales to reach 15 percent and 13 percent respectively, actual growth was 10 percent and 11 percent. Contributing factors were sluggish foreign demand and domestic challenges such as insufficient fiscal revenue. With more of the same expected this year, reaching or even surpassing the GDP growth target of 6.5 percent will be a challenge.

To accomplish this target, the government seems to have decided to adopt expansionary money and fiscal policy.

The Government Work Report targets a 13 percent growth of M2, a broad measure of money supply that covers cash in circulation and all deposits, which is 5 to 6 percent higher than nominal GDP growth. The government is using the term "prudent monetary policy", but we believe it's actually rather loose.

At the same time, the government increased the fiscal deficit to 3 percent, the highest level since 1949. Xu Shaoshi at the NDRC says the central government's investment budget will increase to 500 billion yuan ($76.7 billion; 69.8 billion euros), suggesting that it continues to view investment as a key driver of growth.

We note that the Government Work Report avoided the term "deleverage", a key task set out in the central working conference in December. This further confirmed our view that the government is concerned about the risk that deleveraging could bring. As stabilizing the economy becomes its top priority, we believe the government wants to encourage leverage rather than deleverage.

For example, in addition to increasing the fiscal deficit, we note that local government bonds will replace local government debt this year. Lower interest costs will help them to boost local infrastructure investment. Zhou Xiaochuan, governor of the People's Bank of China, recently said that mortgage loans as a percentage of total loans in China are still low, indicating that the country still has the potential to increase leverage. We believe that the relatively low debt ratio of the government and the residential sector means China still has some room to resort to leverage to boost growth in the near term.

A large portion of the Government Work Report focused on the potential risks that the economy is facing. In fact, at Xu's news conference, several journalists asked about those risks.

A key challenge this year will be how to maintain social stability while dealing with consolidation of overcapacity industries. Li says the government will offer 100 billion yuan to train and help workers who are laid off in the process, as well as create new jobs for those workers.

Financial risk is another concern. The Government Work Report not only emphasized avoiding any regional and systematic financial risk, but also mentioned reform of China's financial regulatory system as a priority. We also believe China should try to coordinate its exchange rate policy with other economies, so that US dollar appreciation will have less of an impact on the Chinese economy.

Structural reform is still necessary, but with more attention being placed on stabilizing the economy, this may be delayed. However, we believe that only though concrete structural reform can China boost productivity and make growth sustainable.

The author is the chief economist of Mizuho Securities (Asia) Limited. The views do not necessarily reflect those of China Daily.

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