China tackles flagging growth on back of difficult structural reform, weakening global demand

A worker walking past a pile of steel pipe products in China's Hebei province, on Nov 3, 2015.
A worker walking past a pile of steel pipe products in China's Hebei province, on Nov 3, 2015. PHOTO: REUTERS

China is targeting an economic growth at or above 6.5 per cent on average for the next five years, Premier Li Keqiang said on Saturday (March 5), as the world's second-largest economy tackles flagging growth on the back of difficult structural reforms and weakening global demand.

Unveiling a draft of its 13th five-year development plan at the annual meeting of its legislature, the National People's Congress (NPC), Beijing said it would target growth of between 6.5 per cent to 7 per cent this year.

This is the first time in two decades the country is setting a growth range instead of a target. Last year, the Chinese economy grew at 6.9 per cent, its slowest pace in 25 years.

"In setting a projected growth rate of between 6.5 to 7 per cent, we have taken into consideration the need to finish building a moderately prosperous society in all respects and the need to advance structural reforms," Mr Li said in his government work report delivered at the NPC's opening in Beijing.

"It will also help guide market expectations and keep them stable. The aim of maintaining stable growth is primarily to ensure employment and promote the people's well being and a growth rate of between 6.5 to 7 per cent will allow for relatively full employment," he added.

China aims to create at least 10 million urban jobs this year and keep unemployment rate in cities within 4.5 per cent.The announcement comes even as the government flagged major job losses in the key production industries of coal and steel in the past week as policymakers push to eliminate inefficiencies and overcapacity in state-owned firms through consolidation and layoffs.

China aims to lay off five million to six million state workers over the next two to three years, two sources told Reuters, Beijing's boldest retrenchment program in almost two decades.

But its leaders also turned towards fiscal policy to boost growth, with China raising its projected Budget deficit for 2016 to 3 per cent of gross domestic product (GDP). The deficit is up from 2.3 per cent of GDP in 2015, the Finance Ministry said in its 2016 Budget.

Fiscal spending for 2015 grew 13.2 per cent, exceeding a target of 10.6 per cent.

China's newest five-year plan is a blueprint for economic and social development between 2016 and 2020. The floor of 6.5 per cent in the range reflects the minimum average rate of growth needed over the next five years to meet the government's goal of doubling GDP and per capita income from 2010 to 2020.

Here is a quick take from experts on what the latest economic targets mean:

On China's 2016 targeted growth range

"There's a lot of uncertainty, not only in China, but also in the global environment that Beijing can't control such as commodity prices and weak global trade so having a growth range rather than a fixed hard target gives policymakers more flexibility to make adjustments. China now has more room to move in its fiscal and monetary policies."

- UOB's China economist Suan Teck Kin

On China's increased budget deficit

"It's a step in the right direction as it could mean that the government might reduce the tax burden on companies and increase social spending but I still think it's too low. It is really disappointing and has fallen short of market expectations, especially with central bank officials commenting last month that China has room to increase its budget deficit to 4 per cent of gross domestic product."

- Mr Chen Long, an economist with Beijing-based research firm Gavekal Dragonomics

On China's 13th five year plan economic growth target

"I think that the average target of at least 6.5 per cent is a bit on the high side because it gives less room in the short-term for structural reforms to be implemented. Growth might still need to be boosted with monetary policy stimulus, which the government introduced in the past but that caused a lot of the problems that we are seeing now such as high debt levels. The need to maintain a certain growth rate goes against reforms."

- Dr Wang Xiaolu, deputy director of the National Economic Research Institute