With the US-China trade war likely to drag on, are Beijing’s economic growth targets still valid? Maybe not
- Markets believe certain growth levels need to be maintained in China’s quest to become a ‘moderately prosperous society’ and, ultimately, a superpower
- However, with the trade war and changing external circumstances, missing growth targets might become the new norm
For example, the three northeastern provinces – Liaoning, Heilongjiang and Jilin – posted growth rates of 5.7 per cent, 4.3 per cent and 1.8 per cent in the first three quarters, lower than the respective targets of 6 to 6.5 per cent, 5 per cent and 5 to 6 per cent.
However, if we extrapolate the data, we are likely to witness a sub-6 per cent growth rate soon, which is seen by many as Chinese policymakers’ lower limit.
While the Chinese authorities have watered down the target in recent years, markets tend to believe that certain levels of growth have to be maintained as they matter in the context of China’s long-term strategy. So, then, the question is: are these levels still valid?
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To be honest, the answer is unclear for now. However, with the rapid evolution of China in recent years, markets may need to revise the China story accordingly.
This explains why policymakers have exercised restraint in policy easing over the past few quarters, to the disappointment of investors, particularly bond traders.
For instance, companies are finding it hard to spell out concrete long-term plans, given all the trade uncertainties. And this is probably morphing into a global phenomenon, as manufacturing investment melts across major economies.
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Needless to say, Asean countries could become the next targets of the trade war if they run widening trade surpluses with the US. So companies have to worry about the risks in their search for alternatives.
Hence, without a fundamental resolution to the US-China trade dispute, a cautious mood should continue to grip the real economy, and drag down overall growth prospects. A further slowdown in the Chinese economy looks inevitable.
Essentially, markets need to accept that a new China narrative is taking shape: Beijing will seek an equilibrium between growth, financial stability and external dynamics. Unlike in the past decade when the external environment was much more favourable, China will now have to make a greater effort to overcome global challenges.
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From this perspective, the growth target will be much less important, and marginally missing it might become the new norm.
By this logic, it shouldn’t be surprising if China scraps the official target at some point. Like it or not, this is the price it might have to pay to play a long game in the trade conflict.
Hao Zhou is senior emerging markets economist at Commerzbank