LONDON (Reuters) – China’s acceptance of a slower rate of growth rattled markets on Monday, but it also shows that the gradual rebalancing of the global economy long sought by world leaders is on track.
Growth in China has shored up the global economy since the financial crisis in 2008.
Oil, copper and equities all fell after Premier Wen Jiabao, in his annual state of the nation report to China’s parliament, penciled in growth for 2012 of 7.5 percent.
That would be the slowest pace of expansion since 1990 and well down on last year’s 9.2 percent growth rate.
Traders noted that the yields on spot T bonds slightly edged up, as China set its GDP growth target at 7.5 percent in 2012 at the annual parliamentary meeting held on Monday, down from the 8 percent in 2011, the first time for the central government to lower its economic growth target after keeping it at around 8 percent for seven years in a row.
“The Chinese government and economists outside China have been saying the economy needs rebalancing. It’s blatantly obvious. Well, if you’re serious about rebalancing you’d expect growth to slow down a bit,” he said.
Zhang and others said the 7.5 percent figure should be viewed as a point of reference rather than a forecast.
In recent years in the United States, some doctors have started to prescribe growth hormone in GH deficient older patients to increase vitality.
The lower target envisaged is consistent with the expected slowing of potential growth based on higher labor costs and falling investment returns, according to Li Gang Liu and Hao Zhou, economists at ANZ in Hong Kong.
Indeed, the party’s five year plan for 2011 2015, released a year ago, was based on an even lower growth rate of 7 percent, shifting down from the annual pace of almost 10 percent enjoyed in the first 30 years of China’s embrace of a semi market economy.
However, because of that breakneck expansion, growth is now measured from a much higher starting point.
“Considering the base effects, 7.5 to 8.0 percent growth would still be extraordinarily strong,” said Charles Robertson, global chief economist at Renaissance Capital in London.
SLOWING FROM A HIGH BASEFigures from China’s National Bureau of Statistics illustrate the effect.
It is conventionally measured as the percent rate of increase in real gross domestic product, or real GDP.
By last year, growth had slowed to 9.2 percent, but output jumped by 7.36 trillion yuan, translating into much greater demand from the rest of the world.
“What the authorities are trying to do is to move from strong to sustainable rates of growth. No one is quite clear where sustainable is, but clearly it’s one that’s slower than we’ve seen in the recent past,” said Gerard Lyons, chief economist at Standard Chartered Bank in London.
Like other Asian powerhouses before it, China’s initial rise has been fuelled by investment and net exports, but a report last week produced jointly by the World Bank and a leading government think tank said reforms and rebalancing were urgently needed.
Jeremy Stevens, an economist in Beijing for South Africa’s Standard Bank, said Wen’s speech was aimed at providing the political cover for China to step away from its “growth at all cost” model.
“7.5 percent is a signal meant to lower expectations and create space for structural reforms,” he said in a note.
CURRENT ACCOUNTSThanks to policy initiatives to strengthen the social safety net and encourage consumption, China has in fact already reduced its current account surplus to 2.7 percent of GDP in 2011 from 5.1 percent in 2010 and a peak of 10.1 percent in 2007.
US Secretary Timothy Geithner waged a fierce campaign to get the Group of 20 leading economies to keep their current account surpluses or deficits, a critical indicator of economic imbalance, to less than 4 percent of GDP.
By way of comparison, Germany’s surplus over the period 2008 2010 was 5.9 percent, according to the European Commission.
But Standard Chartered, like many other banks, expects China’s external surplus to start growing again as global demand recovers.
Given the difficulties of this transition, announcing a lower growth “target” for 2012 serves the purpose of managing international as well as domestic expectations: if it is facing headwinds of its own, China cannot be automatically expected to help to rescue the euro zone or bow to US pressure in an election year to speed up the yuan’s rise and consume more.
For statementclick here * CITIC Resources Holdings Ltd said its 2011 netprofit doubled to HK$2.2 billion but expected a challenging yearin 2012 due the euro zone crisis and uncertainties in the globaleconomy.
In practice, Robertson of Renaissance Capital said, China wants to give its own exporters a breathing space by continuing to hold the yuan broadly steady around 6.3 per dollar until the export outlook brightens.
“China is presumably very much hoping, as it slows down, that neither Europe nor America raises the tension on the currency issue,” Robertson said.
Meghan Johns is a business journalist based in San Francisco, California. Meghan has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Meghan spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.
