China’s Growth Slows, No Excessive Stimulus Expected

Despite low growth forecasts, Chinese Prime Minister Li Keqiang is depending on structural reforms over economic reforms to keep the world’s second largest economy on track. At the opening session of the National People’s Congress last week in Beijing, Li Keqiang pointed to ‘pragmatic and steady growth’ in the government’s work report for 2015.

The annual meeting of the National People’s Congress takes place every spring and is attended by around three thousand delegates hailing from all administrative regions of China, making it the largest parliamentary gathering in the world. The Chinese premier presents the government’s annual work report at the opening of the meeting. This is considered a major document as it provides an overview of the previous year as well as fixing the targets and policies for the upcoming year.

The work report for 2015 detailed the difficult shift experienced by the Chinese economy as the country moved from a development model based on labor-intensive low-cost manufacturing, exports, heavy industry and high-volume investment in infrastructure toward a new and more sustainable model based on technology and, domestic consumption, capital-intensive production and investment focusing on quality rather than quantity.

Revised Growth Numbers

The 2015 summary showed that China’s economy was growing more slowly than in the recent past and the Chinese government has been revising its growth forecasts. Following the announcement of an annual growth rate of 6.9 percent for 2015, the forecast for 2016 was lowered from 7 percent to between 6.5 and 7 percent. Moreover, the report also sets a target to double the 2010 GDP and per capita personal income by 2020. Reaching this target requires the economy to grow at an average annual rate of at least 6.5 percent during this five-year period which, while not impossible, requires the effective and immediate implementation of structural reforms.

China’s central bank, however, won’t resort to excessive stimulus to bolster growth. According to Governor Zhou Xiaochuan, the PBOC will keep a flexible stance in the event of an economic tremor – domestic or global. As part of the authority’s prudent monetary policy, the Chinese central bank has cut interest rates six times since November 2014 and has reduced the amount of cash that commercial lenders must hold as reserves. The last policy easing was on Feb. 29 when the reserve requirement ratio was lowered.