China’s government has announced its new economic growth target for 2017. At “around” 6.5% it’s just a bit lower than the 2016 target of 6.5% to 7%. China’s GDP grew by 6.7% in 2016.
The slight decline in the headline growth target is echoed throughout the government’s planning. The target for fixed asset investment, for example, is growth of 9%. Last year’s target was 10.5% and the actual growth rate in 2016 was 8.1%. Retails sales, for take another example, is projected to show a slight dip to 11%. The government’s target for its fiscal deficit remains unchanged at 3% of GDP. Last year the budget deficit actually ran at a 3.8% rate.
Ratcheting down the growth target, even slightly, in the run up to the end of the year Communist Party congress that will ratify a second five-year term in office for President Xi Jinping is a sign, in my opinion, of how firmly in control Xi is. He can afford to back off a little on growth in favor of reining in the housing and banking sectors because he has so firmly grabbed control of the power structures of China’s government and economy.
But Xi remains a very cautious and conservative leader who doesn’t show signs in this plan of risking very much in order to reform China’s economy. Growth in China’s economy remains lashed to government spending on infrastructure and other fixed assets. China spent more than $10.8 trillion on infrastructure from 2006 to 2015, Bloomberg calculates. And that spending doesn’t show any signs of slowing down. Outlays for roads, airports, ports, railways, and other infrastructure projects climbed 17.4% in 2016. That’s a troubling increase in the context of any economy that grew by “just” 6.7%. Gaining solid information on the real rate of growth in China is always a tough job but the consensus among economists is that China is getting less economic growth for its infrastructure yuan than it used to.
Which is a problem given the high levels of debt that all this spending has pushed onto China’s balance sheets. Total debt was about 260% of GDP in 2016, up from about 160% in 2008, according Bloomberg. In the past in other countries that level of debt and that kind of increase has served as the lead in to a financial crisis. China’s economic system isn’t like that in most countries, I grant you, but that doesn’t make China immune from the pressures of rising debt.
One place I’d expect to see those pressures manifest themselves in 2017 is in the value of the yuan. If China has to keep its export-driven economy running as fast as it can, and if individual Chinese and foreign investors and traders worry about the foundations of China’s economy, I’d expect the yuan to remain under pressure in 2017 and for the People’s Bank to have to continue to spend down foreign exchange reserves to keep the decline of the yuan orderly.