Xi acknowledges economy could slow to 6.5%

November 3, 2015 3:16 PM (UTC+8)

 

President Xi Jinping officially announced China’s economic growth will come in lower than 7% for each of the next five years, and could be as low as 6.5%.

While explaining a proposal for the country’s 13th five-year plan, a blueprint for economic and social development between 2016 and 2020, Xi said it is possible for China to have annual economic growth of around 7% over the next five years, state media agency Xinhua reported on Tuesday.

Let’s just wait for all the conspiracy theorists to shout, “See they’ve been making up numbers all along!”

Let’s not look at it as making up numbers; let’s just call it being a politician.

The occupational hazard of politicians is they need to give a vision of a better future to give people a reason to vote, or just follow them.

Sometimes, the politician means it and is pointing hopefully to a future that he knows his followers want to see. And he wants to give it to them. He really does. But, let’s face it most economic and financial predictions are just fortune telling with a professional presentation.

In a great CYA move, XI said while it was possible for China to have annual economic growth of around 7% over the next five years, but there still remain many uncertain factors, such as highly leveraged firms, Xinhua reported.

Well, isn’t that always the case? Isn’t uncertainty the main ingredient in predicting the future?

So, the world wants to hear that China isn’t seeing a sharp slow down in economic growth. And the Chinese government is betting on continued growth to increase their power and prestige on the world stage.

The party line is that China will see 7% growth in gross domestic product this year, and the world want to hear that the world’s second-largest economy is slowing down at a gradual pace.

So, why wouldn’t he tell people what they want to hear?

Then XI said annual growth would be no less than 6.5 % in the next five years to realize the country’s goal of doubling 2010 gross domestic product and per capita income by 2020, according Xinhua, although it gave no indication of where he said this. Uh-oh, now he’s acknowledging it might be as low as 6.5% and that’s a bit of a leap from “around 7%” lets face it, depending on your philosophy on rounding numbers to the nearest integer, it’s also “around 6%” which is a big difference.

And while the Chinese government has an unfair ability to influence and manipulate its economy, it’s trying to move away from that and rely on a market-based economy based on domestic consumption. The hope is this will be more sustainable compared to trade and investment. Because how many new, empty cities can one economy handle? However, markets are unpredictable and skittish and don’t have 5-year goals.

Private sector analysts have warned that sticking to a high target could conflict with official efforts to shift China to this more sustainable growth. Some say a more realistic level would be 5.5% to 6%, which still would rank China among the fastest-growing countries in the world.

Xi said “maintaining a medium-high level of growth” was required for “comprehensively building a moderately prosperous society,” according to Xinhua.

China’s GDP per head is about $8,000 compared with $55,000 for the US and $36,000 for Japan.

But let’s be serious, this number is a matter of respect and credibility to the Chinese government, and they will do what they can to make sure the numbers don’t come in any lower for fear of losing face, witness the manipulations this past summer to make sure the stock market didn’t go into freefall.

For instance, last week, the ruling party reversed it’s major social engineering experiment, to limit families to only one child, and said it would allow all couples to have two children because the country needs more young workers in a rapidly aging society.

On Tuesday, the party also said its leaders agreed last week to make the yuan a “freely tradable and freely usable currency” by the end of their next five-year development plan in 2020.

Beijing has been gradually expanding use of the yuan abroad for trade, but restricts the daily movement of its exchange rate and the flow of money in and out of China.

Chinese leaders have said for years they eventually would allow the yuan to be freely traded. But they said that would require extensive reforms to China’s state-run financial system to make banks and other entities capable of coping with more abrupt changes in interest rates and financial flows that might result from that.

The announcement comes at a time when analysts say market forces are putting downward pressure on the yuan. That could mean a loosening of controls would cause the currency to weaken, making the decision more politically acceptable domestically by reducing the price of Chinese exports and helping exporters who are struggling with weak global demand.

Tuesday’s one-sentence party statement gave no indication what changes in currency regulation were to come or when.

The party said it also would promote the yuan’s addition to the basket of currencies used by the International Monetary Fund to determine the value of its in-house currency, known as Special Drawing Rights. Gaining a place alongside the dollar, euro, yen and British pound would be a political trophy reflecting China’s growing financial importance.

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