Chinese growth rate of 6.5% ‘very difficult’ to achieve to 2020

BEIJING — A state adviser for China, which published worrying inflation data at the weekend, has said it expects to face great difficulty in achieving economic growth above 6.5% over the 2016-20 period, due to slowing global demand and rising labour costs at home.

A pedestrian walks past an electronic stock board displaying the Nikkei 225 Stock Average and the Shanghai Stock Exchange Composite Index in Tokyo, Japan. Picture: BLOOMBERG/TOMOHIRO OHSUMI

China’s consumer inflation barely edged up in December while companies’ factory-gate prices continued to fall, data released on Saturday showed, adding to concern about growing deflation risks in the world’s second-largest economy.

In line with sluggish activity, China’s consumer inflation quickened slightly to 1.6% year-on-year in December, as expected, compared with 1.5% the previous month.

The producer price index was unchanged at -5.9% in December, the National Bureau of Statistics said on Saturday, slightly above forecasts but marking a 46th straight month of declines and highlighting the deeply entrenched pressures facing China’s manufacturers as the economy cools.

“The inflation profile remains soft and the continuous PPI deflation suggests that Chinese companies will have to reduce their debt as further expansion in many industries will only lead to more loss,” wrote Zhou Hao, economist at Commerzbank in Singapore.

“In the last 30 years of reforms and opening up, China’s gross domestic product has posted annual growth of around 10%. Against this, 6.5% is not high, but it will be very difficult to achieve this pace of growth,” Li Wei, president of the State Council’s Development Research Centre, was quoted on Monday by the China Securities Journal as having said at the weekend.

He said the main impeding factors were a likely global economic slowdown, rising labour costs that were eroding China’s competitive advantage, and growing environmental concerns that meant the country could not industrialise arable land at as rapid a pace as before.

President Xi Jinping has said that China must keep annual average growth at no less than 6.5% over the next five years to hit the country’s goal of doubling gross domestic product and per capita income by 2020 from 2010.

China is set to release fourth-quarter and full-year gross domestic product (GDP) data on January 19. It is expected to report 2015 growth cooled to about 7%, the slowest in a quarter of a century.

An official survey last week showed China’s manufacturing sector contracted for a fifth straight month in December and factories continued to shed jobs, dampening hopes that the economy would enter 2016 on steadier footing.

China Beige Book International (CBB) said in its latest private survey that growth in input prices and sales prices for Chinese firms slipped to record lows in the fourth quarter.

“For the first time, it looked like firms were encountering genuinely harmful deflation,” the private survey said. That opinion was echoed by other economists.

The risk of entrenched deflation is a nightmare for China, which desperately wants to avoid becoming stuck in a trap where falling prices sap economic vitality.

Deflationary cycles encourage consumers to hold off from buying and businesses to hold off from investing indefinitely, on expectations that prices will continue falling.

Such cycles can prove extremely difficult to escape, and Chinese policy makers have kept a worried eye on the example of Japan, where a strong currency, distorted banking sector and muddled monetary policy combined to suppress growth for decades.

Given how stubborn deflationary pressure has proven in China, regulators appear to be bringing the exchange rate to bear on the problem. After spending most of 2014 holding the yuan steady while other currencies dropped against the dollar, Beijing since August has let its currency fall more than 6% against the dollar, to its weakest level since 2011.

A weaker yuan could help to fight deflation imported via sliding commodity prices, while providing some support to the struggling export sector and allowing the central bank to stop drawing down its foreign exchange reserves to hold the yuan firm against the dollar.

That would also indirectly support efforts to lower onshore borrowing rates for debt-laden Chinese firms, although it would make the cost of servicing their offshore debt far more expensive. In response, it appears that Chinese corporations with dollar-denominated debt are hurrying to pay it down before the yuan weakens further.

A rising chorus of policy advisers and industrial constituencies is lobbying for an even deeper devaluation to the currency, by as much as 10% to 15%, despite the risk of a potential currency war of competing devaluations in Asia.

China’s consumer price index is likely to climb 1.7% in 2016 from last year while its producer price index is forecast to fall 1.8% year-on-year, the central bank said in a working paper last month.


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