No GDP target set due to uncertainty
May 26, 2020 Category Macro-economy, Weekly
After a contraction of the Chinese economy by 6.8% in the first quarter and uncertainty over markets abroad during the Covid-19 pandemic, the Chinese government decided not to set a GDP growth target for this year. Some analysts are expecting a second successive quarterly contraction, which would send the Chinese economy into its first recession since the end of the Cultural Revolution in 1976.
“We still expect 1% growth for the year, but a further contraction in the second quarter,” said Carlos Casanova, Asia-Pacific Economist at insurance firm Coface. “We cannot exclude the possibility of negative growth for the full year if there is another coronavirus outbreak in the autumn or in case of a deeper global recession.” Any recovery later in the year is dependent on no further viral outbreaks, no more lockdowns, and the stimulus measures announced at the delayed National People’s Congress (NPC) being effective.
For the most part, economists agreed that China should focus on more tangible and “practical” items like jobs, at a time when Beijing is facing an unemployment crisis. Peking University Finance Professor Michael Pettis said the decision to drop the growth target “is potentially good news for China if it represents a real change in economic policy”, signaling that it would focus on sustainable demand, consumption and private sector investment to drive growth. “If they have only dropped it temporarily while they try to figure out the full impact of the pandemic, and later select an implicit target that relies heavily on non-productive spending on infrastructure and real estate, then this really does not change anything,” Pettis said on Twitter. Shao Yu, Chief Economist at Orient Securities in Shanghai, said abandoning the GDP growth target was a “realistic” move, in line with public opinion amid the once-in-a-century challenge posed by the coronavirus. “Setting a numerical goal is way too mechanical for this year, so more emphasis was placed on protecting basic livelihoods, small companies and employment,” Shao said.
However, the shift away from a top-down growth strategy may present some challenges for local governments, which are hardwired to chase growth goals. “This is a fundamental change for a system driven by top-down signaling to ministries and local governments. How will everyone adapt?” asked Scott Kennedy, China watcher at the Center for Strategic and International Studies. Deng Feng, Professor at the Peking University Law School, added that removing the growth target will not stop provinces from competing with each other. “The Chinese political system is like a tournament, where there is always competition between local officials. Even if there is no GDP target this year, provinces would still want to exceed their competitors in terms of GDP, which heavily relies on infrastructure construction,” Deng said.
Analysts from the Economist Intelligence Unit (EIU) pointed out that “Premier Li Keqiang mentioned employment a total of 38 times” in his speech to the NPC, in a sign of how worried Beijing is about the situation. China will try to keep the surveyed jobless rate at 6.0% for 2020, which will be a significant challenge, given the fact that it peaked at a record 6.2% in February and was at 6.0% in April. The unemployment rate does not include the more than 300 million migrant workers.
Some analysts have estimated that real unemployment in China may be running as high as 20%. “The annual budget points to fiscal stimulus this year at least on a par with that following the global financial crisis, and while monetary policy is likely to remain more constrained than in 2009, the NPC did signal further rate declines and faster credit growth,” said Julian Evans-Pritchard, China Analyst at Capital Economics, as reported by the South China Morning Post.
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