Friday, March 8, 2013

China’s official 2013 policy targets

The members of China’s National People’s Congress (NPC) met this week.  The primary purpose of the Congress is to formalise the senior political appointments that were decided on at the Communist Party Congress in November last year.  Of more than passing interest to economists is the one of the other purposes of the NPC: the setting of the official policy targets for 2013.

The NPC retained the previous GDP target of 7.5%, but lowered the targets for the CPI and growth in the money supply.  The CPI target was lowered from 4.0% to 3.5% and the money supply (M2) growth target was lowered from 14% to 13%.  The fiscal target was set at a deficit of 2%.

We believe the 7.5% growth target will be met. While we think the cyclical upturn that began in the December quarter of last year will remain modest, we have recent revised our GDP growth forecast for calendar 2013 to 8.2%.  In that respect, 7.5% should be easier to achieve in 2013 than it was in 2012 when growth spent the first three quarters of the year on a downward trajectory.  

The fiscal target of a deficit of 2% of GDP for 2013 will likely be mildly expansionary.  The deficit for 2012 was 1.6% of GDP which was an increase from 1.1% of GDP in 2011.  While higher growth this year will result in higher revenues, expenditure will also be higher.  We expect new spending to be concentrated predominantly in social areas.

The most interesting aspect of the announcement was the reduced inflation and M2 targets.  Given that both CPI inflation and money supply growth are passed their respective cyclical lows, the reduced targets confirm a shift from a “bias to ease” to a “neutral” monetary policy stance.  However, we don’t expect a tightening in broad monetary conditions (interest rates hikes) this year – I still think that’s a 2014 story, but the risks have shifted to an earlier move.

Tempering the concern of an earlier hike in interest rates is the recent moves by authorities to contain the nascent recovery in the housing market.  The key word in that sentence is “contain”.  I don’t think authorities are looking to achieve anything more than avoiding another housing market bubble. I also think there is more at play here than just concern about inflation; the politics of housing affordability can’t be ignored.

At this point I’m still comfortable with my forecast of 8.2% growth this year, but much will hinge on the path of inflation over the next few months.  More generally I’m very comfortable with a lower inflation target.  One of the risks we highlighted for emerging markets in the period immediately after the GFC was the possibility they didn’t take inflation risks and costs seriously.  It seems to me the new China targets support the focus on the quality rather than the quantity of economic growth.