BOFIT Viikkokatsaus / BOFIT Weekly 2017/10

In his address on Sunday (Mar. 5) to the opening session of the annual National People's Congress, premier Li Keqiang presented a passel of numeric targets to provide guidance for this year's economic development plans. The 2017 GDP growth target was set at "around 6.5 % or higher if possible." Last year GDP target was a range of 6.5–7 % and realised growth was 6.7 %. The leadership's current focus on rigid numerical growth targets limits its ability to proportion economic policy appropriately and focus on pressing issues.

Despite the structural change and needed economic reforms, the government aims to sustain high growth through boosting domestic consumption and fixed investment. However, Li's speech emphasised the need to keep financial market risks in check. One aspect of maintaining stability is to rein in the rapidly rising indebtedness of state-owned firms through such measures as closing unviable "zombie" firms. This year's goals include increased energy efficiency and improved environmental protection, greater emphasis on innovation and reducing production capacity especially in the coal and steel industries. The themes are familiar from previous years, even if many partial reforms e.g. in the corporate sector have failed to reach their intended targets. The government this year wants to create 11 million new jobs in urban areas, while keeping the pace of income growth in line with economic growth. The economy created 13 million new jobs last year.

China's monetary policy is constrained by the rapid rise in debt levels and, among other things, the anticipated interest rate hikes in the US. The monetary policy targets were set a little bit tighter than last year. The money supply (M2) and total social financing (TSF) are targeted to increase 12 % this year, a percentage point less than last year. The growth target, however, is significantly higher than nominal GDP growth, which suggest that the growth in indebtedness will continue. This year's 3 % inflation target is not expected to constrain monetary policy, however. Premier Li said that measures to liberalize the exchange rate will continue. Unlike earlier years, his speech did not emphasise the importance of exchange rate stability, but instead stressed maintaining stable position of the yuan in international monetary system.

Li emphasized the stability of economic development and president Xi's mantle-bearing as the "core" of the party. He set the stage for the Party Congress meeting in October-November, when the persons selected for the next five-year administration are approved and start setting directions in economic policy. The National People's Congress and People's Political Consultative Conference will meet through next week.