The Report on the Work of the Government sets the following economic targets for this year: gross domestic product (GDP growth, 7.5%; consumer price index (CPI) control target, 3.5%; money supply (M2) growth, 13.0% and fiscal deficit, 2.0% of GDP. The 2012 figures were respectively 7.5%, 4.0%, 14.0% and 1.5%. In other words, the government maintains last year’s GDP growth target, increases the proportion of fiscal deficits and sets lower targets for M2 growth and CPI. These are quite consistent with market expectations and reflect policy continuity.
The GDP growth target is within the target range identified in the Report to the 18th National Party Congress for the coming decade, with a gradual slowing down of the too fast growth of previous years and a focus on the quality and efficiency of economic growth. The basic idea will not change in the coming years. Can the target be achieved this year? The current economic situation is better than 2012. With hot sales on the real estate market, GDP may exceed 8% for the first few quarters. The probability of a GDP growth higher than 8% for the whole year is rather high. With the start of a new political cycle in particular, we may witness a new wave of investment by local governments, increasing the probability of growth above 8 percent.
Upon taking office, the new government will need to maintain the speed of economic growth and at the same time address some major problems, such as real estate bubbles, shadow banking risks and investment fervor at the start of the political cycle. How these two can be balanced will be a key point of consideration for the new government. With America recovering, the deepening of the European sovereign debt crisis and the depreciation of the Japanese Yen, there is still turbulence in the international market, adding uncertainties to Chinese economic development. The new government will need to reflect over and make renewed judgment of the domestic and international economic situations so as to identify the path to a balanced growth and define more appropriate policies accordingly.
The CPI target of 3.5% is largely related to the relatively low actual CPI growth in 2012. It may be fairly easy to achieve since the overall price level is fairly low against slow global recovery and some countries need to address deflation rather than inflation.
The M2 growth target for this year is 13%, one percentage point lower than last year’s money supply. The market may be concerned thinking that the Central Bank will tighten monetary policy. However, this is not correct. The Central Bank wants to have more appropriate levels of money and credit growth and may have proposed the target out of three considerations. First, the reverse of the domestic real estate market in 2012 was largely due to monetary policy change. Second, shadow banking risks in China are increasing and may well be enlarged if there is too much liquidity. Third, with financial innovations mushrooming, the domestic financial market has in the past few years evolved into a diversified financing system, in which the proportion of bank credit in overall financing has decreased, leading to reduced significance of monetary policy targets.
Let me now turn to the 2.0% fiscal deficit target. The fiscal deficit target set by the government for 2012 was 800 billion yuan or 1.5% of GDP, while the actual deficit stood at 850 billion or 1.6% of GDP. This year’s deficit target is bigger than last year, meaning a more “proactive” fiscal policy. The purpose may be two-folded. The first is to increase expenditures for better livelihood such as investing in social securities, health care and indemnificatory housing; the other purpose is to create conditions to tackle local government debts. Current risks of local government financing vehicles (LGFV) mainly occur in relatively underdeveloped places. The central government will use the greater deficit to move some fiscal expenditure responsibilities from local government to the central. Such a transfer will not only help mitigate LGFV risks but also benefit local economic growth for the backward regions to catch up. In this connection, the more proactive fiscal policy of the central government will be a driving factor for growth.
The various economic targets for 2013 suggest that the government intends to steer the Chinese economic development into a new direction without introducing excessively radical policy changes or reforms. By doing so huge social impact of new economic reforms can be reduced, thereby laying down a foundation for continued steady growth in the future. Basically, 2013 will be a period of stable transition. There will not be too many fluctuations. The overall trend is good and there is no need to worry about lack of momentum in economic growth.
Yi Xianrong is a Researcher with the Institute of Finance and Banking at the Chinese Academy of Social Sciences.