China Cuts GDP Target

Leaders seek shift from reliance on exports and capital spending to consumption.

China pared the nation’s economic growth target to 7.5 percent from an 8 percent goal in place since 2005, a signal that leaders are determined to cut reliance on exports and capital spending in favor of consumption.

Officials will also aim for inflation of about 4 percent this year, unchanged from the 2011 goal, according to a state- of-the-nation speech that Premier Wen Jiabao delivered to about 3,000 lawmakers at the annual meeting of the National People’s Congress in Beijing today.

Asian stocks fell as Wen, 69, said the nation needs to shift to a more sustainable and efficient economic model and achieve “higher-quality development over a longer period of time.” China must boost the incomes of ordinary people, count less on exports and investment and reduce the state’s role in favor of private enterprise, Zong Qinghou, the country’s second- richest man, said in a March 3 interview.

“The growth target indicates the lowest level that the government is comfortable with and is also a signal to local officials that they shouldn’t solely focus on the rate of expansion,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong. “China’s trend growth rate is coming down but it’s still higher than this -- more like around 9 percent.”

Wen reiterated that the government will maintain a “proactive” fiscal policy and a “prudent” monetary policy. The government in February lowered banks’ reserve requirements for the second time in three months to boost lending and sustain growth, following five interest-rate increases from October 2010 to July 2011 aimed at slowing inflation.

The MSCI Asia Pacific Index, which has gained for 11 straight weeks, fell 1 percent as of 2:20 p.m. in Tokyo. The benchmark Shanghai Composite Index dropped 0.4 percent at 1:21 local time. The gauge, while up 12 percent in 2012, has declined 16 percent from a year ago as China’s growth decelerated to the slowest since the second quarter of 2009.

The yuan weakened 0.1 percent against the dollar to 6.3047.

Elsewhere in Asia, India’s services industries expanded at a slower pace in February, according to a purchasing managers’ index released today by HSBC Holdings Plc and Markit Economics. Taiwan may say inflation slowed in February from January, according to the median estimate of economists surveyed by Bloomberg.

 

Europe Slowing

European services and manufacturing contracted last month, a final composite gauge may show today. Italy, France and Germany will also release services PMI data today. Euro zone retail sales probably fell 0.1 percent in January from the previous month, the third consecutive decline, economists predicted ahead of the report.

The Institute for Supply Management may say service industries in the U.S. grew at a slower pace in February, while a Commerce Department report may show orders to U.S. factories fell in January.

China’s government plans a budget deficit of 800 billion yuan ($127 billion), or 1.5 percent of GDP, Wen said. That compares with last year’s target of 900 billion yuan, or 2 percent of GDP, and the actual deficit of 850 billion yuan, a figure altered by the use of a so-called budget stabilization fund and shifting some local-government spending, according to the speech. The Ministry of Finance in January gave preliminary budget data indicating a 2011 deficit of 519 billion yuan, or 1.1 percent of GDP.

The growth target matched the median forecast of 15 economists surveyed by Bloomberg News last month. Twelve of 15 economists forecast a 4 percent inflation goal, while the median estimate of 13 respondents was for a budget deficit of 1 trillion yuan.

Officials are targeting money-supply growth of 14 percent, according to the report, in line with the median forecast of 15 analysts for the rise in M2, the broadest measure. China has a goal of increasing fixed-asset investment by 16 percent this year, the National Development and Reform Commission said in a report. That’s below the 18 percent median estimate of 12 economists.

Wen and fellow officials from the ruling Communist Party are preparing to begin a once-in-a-decade handover of power later this year to a new set of leaders. President Hu Jintao and Wen will step down from their roles and let a younger generation of leaders step in that’s likely to include Vice President Xi Jinping and Vice Premier Li Keqiang.

 

Incomes ‘Too Low’

“The biggest hurdle facing China’s economy now is that the government’s income is too high and the people’s income is too low,” Zong, 66, chairman of Hangzhou Wahaha Group Co. and a member of China’s legislature, said in the interview.

The country’s leaders may cut the bank-reserve ratio further this year, Bank of China Ltd. Chairman Xiao Gang said in Beijing. Xiao also said the state-controlled bank, China’s fourth-largest by market value, will have loan growth this year be similar to that of 2011.

“This low growth target with relatively high inflation suggests monetary policy will be relatively relaxed,” said Liu Li-Gang, head of Greater China economics at Australia & New Zealand Banking Group Ltd. in Hong Kong. “This in turn will help increase bank lending and boost investment.”

The National People’s Congress, while often derided as a rubber-stamp parliament, counts some of China’s most powerful politicians and executives as its members. They wield power in their home provinces and weigh in on proposals such as levying a property tax, privatizing state-owned enterprises and changing how China manages its currency.

China was the largest contributor to global GDP growth in 2010 as it surpassed Japan to become the world’s second-largest economy, after an average annual expansion of 10 percent for three decades lifted more than 600 million people out of poverty, according to the World Bank. The nation’s urban population last year surpassed that of rural areas for the first time.

The annual economic-growth targets have been routinely surpassed and are more indicative of the direction of policy. Even so, gross domestic product expanded 8.9 percent in the fourth quarter from a year earlier, the least since the second quarter of 2009. For the full year, growth was 9.2 percent after 2010’s 10.4 percent, compared with the 8 percent goal.

China’s consumer prices rose 5.4 percent last year, exceeding the 2011 official annual target of 4 percent while easing from July’s peak of 6.5 percent.

 

Average Target

Leaders are trying to ensure the expansion slows to no less than an average targeted pace of 7 percent for the five years through 2015.

At the same time, heightened pollution, a widening income gap and an aging population along with an under-developed social-security system are testing Communist Party leaders’ plans to shift to a more-balanced growth model.

On top of that, risks of a deeper slowdown may be rising as Europe’s sovereign-debt crisis is pushing the continent into recession, curbing China’s exports, while the country maintains rules that have ended a surge in home prices. Fifty-nine percent of global investors polled by Bloomberg in September said China’s economy will expand less than 5 percent annually by 2016.

Foreign companies are still looking to the country for growth. Yum! Brands Inc., owner of the KFC and Taco Bell fast- food chains, said fourth-quarter profit gained 30 percent as it opened a record 656 stores last year in China.

China’s exports fell 0.5 percent in January, the first drop in more than two years, as a sluggish global economy hurt demand and the weeklong Chinese New Year holiday disrupted trade. Sales to the European Union rose 14 percent in 2011 after a 32 percent gain in 2010, according to data from China’s customs administration.

 

 Bloomberg News

 

 

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