Summary:- China’s economic growth rate will slow down and Beijing should set targets lower.
- China should to set a GDP growth rate of 6.5 to 7 percent for 2015.
- In 2013, the GDP grew at 7.7 percent. That was above the 7.5 percent target.
After the weak start to the year, along with constant outside, as well as internal drags on the economy, China needs to set a gross domestic product (GDP) growth rate of 6.5 to seven percent for 2015. This is below its current goal for this year. Beijing should also refrain from any stimulus measures unless the economy starts to slow sharply.
Here is why.
For one thing, the Chinese GDP will slow this year. We are expecting them to show a reading of 7.4 percent, below the target set, and seven maybe 7.1 percent for 2015. We are also seeing organizations, like the IMF cutting their 2014 and 2015 economic forecasts. In April, they said the economy in the world’s second largest economy would grow 7.5 percent in 2014 and 7.3 percent next year.
We are seeing weakness in China’s housing market which will pose near term headwinds for their growth. There is uncertainty here and it is building. Thanks to the very large importance of this sector to GDP growth, it will in all certainty pose short term negative affects going forward.
However, these near-term risks remain, for now, manageable thanks to Beijing’s policies and buffers. Still, policy makers must still push reforms to keep this growth rate becomes unsustainable. We are not expecting to hear the GDP growth target till next year but we should expect them to lower their numbers.
Should they, follow economist recommendations, then a target of 6.5 to seven percent would be more realistic as China transforms their economy to a safer path of growth. There are some thoughts as the target should be even lower. This year, for the first time in a long time, China set its target growth rate lower than expected, suggesting they know there is room for the economy to grow slower than expected. After 2014 got off to a weak start, Beijing rushed into a flurry of stimulus measures to offset weak imports and a cooling housing market.
In 2013, the GDP grew at 7.7 percent. That was above the 7.5 percent target. It was underpinned by stimulus measures. The 2014 target is too high and does not give China the room it needs to reform its economy to produce a slower and better quality rate of growth. This is why China should not enact further stimulus measures until the GDP is in danger of falling off sharply and well below the target level. Why? The risks associated with quick growth in credit and investment have risen to the level that it must be contained and reigned in. any stimulus must come in the form of fiscal policy that is already accounted for in government budgets.
China is at the precipice of an economic turning point. We are seeing consumption holding up well and continued global recovery will support this. Inflation should cool down to two percent, well under the 3.5 percent target set by the People’s Bank of China (PBOC). Still China must be careful with stimulus as it reforms its economy to produce a more stable rate of growth. The GDP growth rate will slow, but 6.5 to seven percent are incredibly strong growth rates by any standards.