China’s subtle shift

5 March 2012  •  Source: Michael Derks, FxPro

On the face of it, China’s revision of its growth target was an expected and relatively small change, but this is China we are talking about, so any shift in stance cannot be ignored. The move to target growth of 7.5%, rather than 8.0%, really reflects the official sanctioning of what has been desired for some months now, if not years, namely a shift towards rebalancing growth within the Chinese economy. It is also an official acknowledgement that China cannot endlessly strive for growth at any price, the economy having doubled in size (in real terms) over the previous seven years. Among the recent costs has been inflation above the 4% target, wage growth far beyond what is officially acknowledged and environmental consequences, not to mention social unrest, as the gap between rich and poor has grown wider.

China wants to see less dependence on net exports, less investment and greater domestic consumption. Of course, wanting and achieving this are two very different things. In nominal terms, investment is still running at nearly 50% of GDP whilst household spending is just one-third of GDP, with both trends on heading in the opposite direction to that desired.

So what are the implications for those that have aligned themselves to the China growth story? For now, it’s probably not going to be as much as feared. For one thing, we have to take into account the fact that this is a growth target; actual growth has invariably been above that stated for all the time it has been in place, by 3% on average over the period from 2004 – 2011. Furthermore, there are always issues surrounding the reliability of the data.

As such, beyond what we already know, there is probably little to fear from China’s announcement. As many developed countries have found, shifting the balance of growth can often takes years and, to become a nation of spenders, China will require the social infrastructure to give its people the confidence to do so. Today’s announcement is merely a reflection of the fact that the current leadership recognises the need for change, but the change of course will be very gradual and will take years to achieve.

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