Caution on reform, growth remains key objective

Chinese Premier Li Keqiang delivers a government work report during the opening meeting of the fourth session of the 12th National People's Congress at the Great Hall of the People in Beijing, capital of China, March 5, 2016. [Xinhua/Liu Weibing]

The Government Work Report, delivered by Premier Li Keqiang on Saturday to the top legislature, confirmed that economic growth remains the government's key objective. It emphasized the objective of doubling the 2010 GDP and per capita personal income levels by 2020 and called for average annual GDP growth of at least 6.5 percent over the next five years. Accordingly, the target for 2016 was set at 6.5-7 percent, down from about 7 percent for 2015.

Painful reforms such as shutting down unprofitable State-owned enterprises are easier amid solid growth. But 6.5 percent is an ambitious growth target that will require significant macroeconomic policy stimulus, given the subdued prospects for organic growth drivers such as exports and private investment. It may detract from pursuing the more painful, yet necessary, reforms and reduce the appetite for reining in credit growth and reducing excess capacity. This is a pity because growth of around 6 percent is sufficient.

In any case, macroeconomic policy will be used to support growth, including issuance of special local government bonds and use of some fiscal savings from recent years.

In addition, quasi-fiscal activity will remain large. Notwithstanding efforts to rein in borrowing by local government investment platforms, with infrastructure spending remaining a key policy lever to support growth, new channels for financing have been created, including via rebranded local government investment platforms, policy banks and public-private partnerships largely involving SOEs.

In the monetary sphere, the target, or forecast, for M2 growth is raised from 12 percent in 2015 to 13 percent this year. The forecast for the expansion of total social financing is also 13 percent. This implies, including the expansion of local government bonds via the bond swaps, an increase of 16 percentage points in the ratio of total social financing to GDP this year, raising it to 225 percent.

The government also plans to take further measures to boost the property market and counts on boosting consumption by stimulating "new" urbanization through granting urban residency and public services to more migrants from rural areas.

But the Government Work Report also stresses that China still has "vast scope for growth in effective investment", especially in infrastructure and industry upgrading. This year major projects will be launched under the 13th Five-Year Plan (2016-20) on railways, roads and water conservation.