China cuts growth target to 8 year low to boost consumption

BEIJING - Reuters

Delegates attend the opening session of the National People’s Congress at the Great Hall in Beijing. PM Wen Jiabo’s speech at yesterday’s session was focusing on growth. AFP photo

Chinese Premier Wen Jiabao cut his nation’s 2012 growth target to an eight-year low of 7.5 percent and made boosting consumer demand the year’s first priority as Beijing looks to wean the economy off its reliance on external demand and foreign capital.

He lowered the target from a longstanding annual goal of 8 percent, a move investors anticipated so that Beijing has some economic leeway to rebalance the economy and defuse price pressures in the run up to a leadership change later this year.

Lower growth will allow Beijing to reform key price controls without causing an inflation spike, so monetary policy can stay broadly expansionary to ensure a steady flow of credit to the small and medium-sized firms the government wants to encourage.

“We aim to promote steady and robust economic development, keep prices stable, and guard against financial risks by keeping the total money and credit supply at an appropriate level, and taking a cautious and flexible approach,” Wen said in his annual work report to the National People’s Congress (NPC), China’s annual parliamentary session.

The premier named “expanding consumer demand” as his first priority for 2012, when the ruling Communist Party must also navigate a leadership handover that will send Wen and President Hu Jintao into retirement in 2013.

“We will improve policies that encourage consumption,” Wen told nearly 3,000 delegates of the Communist Party-controlled legislature, gathered under the harsh lights and high ceilings of the Great Hall of the People.

“We will vigorously adjust income distribution, increase the incomes of low- and middle-income groups, and enhance people’s ability to consume,” said Wen.

His annual state-of-the-nation report to parliament dwelled on the institutional and income barriers the government must break to build a more balanced economy that relies less on exports and shares more wealth with hundreds of millions of poor farmers and migrant workers who are reluctant to spend.

Wen and Hu have vowed to wean the economy off dependence on exports, smoke-stack industries and government-backed infrastructure, and promote balanced growth that will elevate the incomes and spending of farmers and workers.

Lowest growth since 1990
Sources had earlier indicated to Reuters that the growth target would be cut to 7.5 percent. Growth of level would be the lowest since 1990.

In reality, the target acts more as a bar to get over. The 8 percent target set in the previous eight years was comfortably exceeded each year -- including in the aftermath of the 2008/09 financial crisis.
“In recent years, the GDP target has obviously always been a minimum acceptable floor rather than a ceiling, so I think it is more likely that in the government’s heart of hearts, it is leaning on growth of a bit above 8 percent,” said Paul Cavey, an economist with Macquarie Bank in Hong Kong.

“It seems very unlikely there will be huge progress on structural reforms given the political transition,” added Cavey.

“The slower growth numbers just reflect the reality that growth is going to be slower because the rest of the world is going to be weaker.”

The highest-value part of China’s growth and around a quarter of its 800 million-strong workforce are dependent on volatile demand and capital from developed economies.

Shifting that balance is a key goal for Wen and Hu, both 69, as they near the end of a decade in power which has seen China become the world’s second-largest economy after the United States, contributing more to global growth than any other nation, while seeing a chasm widen between rich and poor.