The Chinese Premier is sensibly easing back on the emphatic “growth” speak we’ve heard from Chinese officials over recent years, without going so far as to committing a political faux pas by disregarding the ambitious targets laid out by his predecessors.
This is how Bernstein strategist, Michael Parker, has interpreted the Government Work Report Premier Li Keqiang delivered at China's annual rubber-stamping parliament on Saturday.
When discussing China’s latest Five Year Plan (2016-2020), Li said, “We should work to maintain a medium-high rate of growth” (English translation).
Unlike China’s former premier Wen Jiabao, who in 2012 said, “We have to set a target of 7% annual increase in the economy over the next five years”, Li didn’t mention any explicit numerical targets.
Parker dubs Li’s statement as “vague enough that anything short of a recession qualifies”.
“You can make the argument that the Chinese government has embarked upon an incremental shift away from long term growth targets while acknowledging the legacy commitments that the previous administration made,” he says.
The cost of achieving growth of 6.5% over next five years
Parker goes on to explain:
“In November 2012, then General Secretary Hu Jintao announced that China should double its 2010 GDP by 2020. That required China to grow 7% annually for the entire decade. China's GDP growth was 7.7% in 2012 and averaged 7.8% from 2011 to 2015.
“To achieve Hu Jintao's bombastic target, growth from 2016 to 2020 has to average 6.5%. Yet China cannot grow 6.5% for another five years without a reacceleration in borrowing and fixed asset investment.
“Credit efficacy and returns on incremental assets are already at historic lows. The Chinese consumer is in pretty good shape but mandating 6.5% real GDP growth while the economy transitions to services (and parts of the industrial sector are in recession) requires mid-teens growth in consumption for another five years. That's simply not happening.”
The impracticality of setting numerical growth targets in a services economy
Parker says a services-dominated economy cannot set growth targets for itself.
“In an economy where 90% of economic growth comes from services and where a large proportion of those services are purchased by consumers over their phones, dictating growth targets doesn’t make a lot of sense,” he says.
Parker maintains that if you are going to target growth in a services economy, it has to be achievable and not undermine the long-term health of an economy.
“Chinese GDP growth has been decelerating since 2010 when real GDP growth was 10.4%. Between 2010 and 2015, GDP growth fell 350bps,” he says.
“To meet an average growth rate of 6.5% through 2020, GDP growth can decelerate by no more than 80bps over the next five years.
“Li's dual goals to "finish building a moderately prosperous society" and "address serious issues such as unbalanced, uncoordinated and unsustainable development" appear to acknowledge qualitatively these constraints.”
Achieving consumption levels necessary to maintain 6.5% growth a ‘tall order’
Realistically speaking Parker says neither the industrial nor the agricultural sectors are going to be much help driving the economy, so a GDP growth rate of 6.5% is going to require nominal growth in the services sector of around 15%.
With wage growth at 8-10% annually, Parker admits achieving the necessary consumption growth will be a tall order.
Furthermore, he says China will have to stimulate some part of the economy to maintain a growth rate of 6.5%, as this won’t happen organically.
“This stimulus would come at a cost. And it will involve borrowing and investing in new capacity that China doesn’t need and cannot really afford,” Parker says.
Expect to hear less about ‘doubling the economy’ and more about ‘balancing development’
He concludes, “Arguably, the current administration is economically sophisticated enough to realize that once an industrialized economy transitions to services, growth rates slow and there is no option to turn back the clock.
“That is doubly true when debt levels have already spiked and problems with debt servicing capabilities are rising.
“At the same time, the current administration is certainly politically sophisticated enough to realize that you do not contradict the previous political leadership at one of the most high profile political event since the political transition in 2012.
“If these are the constraints the present administration is operating within, China will claw out 6.5% growth – or thereabouts – this year and we will hear a lot less about the doubling of the economy and a lot more about balancing, coordinating and sustaining development.”
Parker says “hope” “expect”, and “should work” is language of “a government observing a services economy, rather than commanding an industrial economy”.
“It is the difference between passive and active management. As a signal, it is a step back from Soviet style mandated targets.”
5 Comments
Now that the Earth has been stripped of all the best natural resources and pollution levels and overpopulation have risen to beyond what natural systems can endure, the days of economic growth are almost over everywhere. No more ghost cities of unaffordable apartments and empty shopping malls in places no one wants to live that created an illusion of spectacular growth.
We are now in the 'End Game' for the entire world, and the inevitable confrontation between the US and China-Russia draws ever closer.
Needless to say, national leaders have to keep up the pretence that the globalised financial-economic system has a future, even as all the fundamentals deteriorate by the month, if not by the day, in order to keep the various general populaces deluded and compliant.
Civil unrest in China is increasing, as the promises of life-long employment and rising prosperity are increasingly unfulfilled and just staying alive becomes increasingly difficult. It's much the same throughout Europe, the US and South America, of course.
7% real growth would imply a doubling of an economy's size every ~10 years. Double the input, double the output, double the pollution, double the resources (with the exception of small efficiency increases reducing this slightly). Can anyone honestly see this happening?
Obviously there isn't the resources or the demand for this to occur for China for much longer (or any of the stalling western economies) and the only way these numbers will be maintained is through growth of the speculative FIRE economy (which funnily enough is exactly what we have seen over the last decade and today).
One must also ask if the Chinese leadership has a long term strategy for their survival? Unless their economic strategies are firmly rooted in reality, they will only be ensuring the cliff is steeper when the step over the precipice. Their unrestrained belief that they can somehow control the world , or at least it's impacts on China are stunning. Unfortunately any failure there will have huge ramifications else where (apologise for stating the obvious), and our challenge is how to insulate ourselves from the worst of the impacts, as we won't be able to do it for all. Election coming soon here, anyone got a plan?
My original plan was to create an informed community by writing books and articles, doing radio and TV interviews, making presentations to councils, standing for election etc. whilst at the same time promoting sustainable food systems based on the concept of permaculture.
None of that worked because we live in a society in which the messengers is 'assassinated' by the corporate media, and the general populace is too dim-witted to see the truth when it is pointed out to them.
We are now 'off the cliff' and falling, yet most people still refuse to acknowledge reality and hang on desperately to faux narratives promoted by politicians, bankers, economists and the mainstream media etc.
'Election coming soon here, anyone got a plan?'
I now see elections as a irrelevant because all parties adhere to the faux narratives of corporations and bankers; even the so-called Green party is worse than useless because 'green' leadership pretend we can maintain current living arrangements by making slight tweaks to the system.
Just how close collapse is depends on who you listen to. This guy is adamant that the US will not make it to the end of 2016:
https://www.youtube.com/watch?v=RhQAugDdbtk
There are plenty in the same camp.
On the other hand, some say that money-printing and manipulation can go on for a lot longer.
As well as all the economic and financial factors we have collapse of the environment, which is accelerating.
No one can predict exactly what will happen but the Arctic is on track to become ice-free this year, and that will cause all sorts of additional mayhem with respect to weather and climate, which will have financial and economic repercussions.
http://nsidc.org/arcticseaicenews/charctic-interactive-sea-ice-graph/
.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.