Here are the marching orders: "China needs to cement its domestic economic growth momentum and guard against potential risks in financial sectors."
Thus spoke last Friday China's party bosses (Politburo Central Committee) in a clear, topical and timely message of measurable performance objectives addressed to the country's new government. The message captures two key issues: economic growth and stability of the financial system.
Growth has been brought down to more sustainable levels after two years of cutting inflation from 6.5 percent to 2.1 percent and fighting rampant property market speculations. Declining export growth from nearly 30 percent in 2010 to less than 6 percent last year has also tamed one of the powerful sources of aggregate demand.
In spite of that, with a growth rate of 7.7 percent in the first quarter, the economy still remains well within the official target range of 7-8 percent. The government, and the markets, can, therefore, take the message to "cement … economic growth momentum" as an invitation to stabilize the economy within that growth interval.
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Unless the new politburo members believe, as some observers do, myself included, that China can grow a bit faster because this target range is probably somewhat below the economy's noninflationary growth potential. That is the implied meaning of the consensus estimate for this year, which calls for a growth rate of 8.5 percent. Some official international organizations go even further by expecting significant growth acceleration to about 9 percent.
Both scenarios leave the Chinese government quite a bit of room to repeat its old "under-promise and over-deliver" routine.
Looking for Quality of Growth
In the meantime, here are two questions. First, can China step up the growth rate from its current level? Second, does China want to grow much in excess of its 7-8 percent target range?
The answer to the first question is an emphatic yes. China's monetary and fiscal policies have plenty of room to ease. Inflation at 2.1 percent is significantly below the central bank's target of 3.5 percent. The budget deficit is 2 percent of gross domestic product (GDP), and public debt is 22.2 percent of GDP, virtually unchanged over the past five years. The household debt stands at less than 30 percent of GDP.
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The answer to the second question is a qualified no. That is what transpires from the recent statements of policy intent by both the new prime minister and by the central bank's governor.
The emphasis in both cases is on stable and sustainable (noninflationary) growth. Prime Minister Li Keqiang recently spoke of the need to "improve the quality and benefits of economic development" as China seeks to reduce its reliance on exports, and to shift more resources toward domestic demand – household consumption, infrastructure and social welfare services.
A similar statement was heard from the People's Bank of China (PBOC) Governor Zhou Xiaochuan during his last week International Monetary Fund (IMF) appearances. He said that China's first quarter growth was "normal" and insisted that this year's growth target of 7.5 percent is in a range that will provide stable (read: noninflationary) economic environment for structural reforms.