China held its annual growth target at 7.5% but widened its fiscal deficit forecast to 2.1% of gross domestic mproduct (GDP) in its new budget. According to HSBC research, benign inflationary pressures should allow Beijing to stabilise growth while speeding up changes.
Besides streamlining government, proposed reforms include a deposit insurance scheme, further liberalisation of interest rates, a wider floating band of the renminbi (RMB) exchange rate, and movement towards capital-account convertibility. China is also planning new tax breaks for small businesses and reforms of state-owned enterprises, which should bring in private capital to industries like banking, oil, electricity, railway, telecoms, resources development and utilities. Transparency in local government budgets is also promised.
China’s economy grew 7.7% in 2013, but GDP growth has been about 10% per year for the past decade while the average fiscal deficit was only 1.3% of GDP. The new forecast thus still leaves room for increasing the deficit if needed.
By keeping the GDP growth target unchanged, Beijing is indicating that it intends to stabilise market expectations and steady the pace of economic growth within a comfortable range. While a rerun of past stimulus is unlikely, there is flexibility to do this with both monetary and fiscal policy.
Current consumer price index (CPI) inflation is below the 3.5% official target, and although a 2.1%-of-GDP fiscal deficit is more expansionary than last year’s 1.9%, it is still small and can be raised if required. Beijing can ramp up improvements of energy protection, public housing and urban infrastructure – lifting short-term demand and boosting mid- and long-term growth sustainability, which can be funded through greater bond issuance and encouraging more private investment.
The unchanged growth target would appear to suggest a lower priority for reform compared with securing growth, but reform and growth should support each other. Stable economic and labour market conditions are conducive for implementing top-down reforms. If properly implemented, they should boost efficiency and long-term growth prospects.
Additionally, lower trade growth targets imply a greater role for domestic demand while the role of investment will also be gradually reduced. Even within investment, priorities are raising public housing construction to 7m homes from 6.3m in 2013, plus agriculture and environmental protection. Meanwhile, increasing social welfare spending and improving employment legislation lean towards greater support for consumption.
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