China: Premier sets a goal of 7.5% growth in 2014

Event

Speaking at the annual session of the National People's Congress (NPC, China's legislature), the premier, Li Keqiang, declared that the government target for economic growth in 2014 would be "about 7.5%".

Analysis

The official GDP growth target sets the scene for a difficult choice between a politically embarrassing failure to meet the goal or an economically risky strategy of allowing credit to continue to expand at an unsustainably fast pace. Economic growth in the last quarter of 2013 averaged 7.7% and there are signs that it has slowed significantly in the months since then. The Economist Intelligence Unit had already expected that the government would be forced to introduce another mini-stimulus in the second half of this year in order to prevent GDP growth falling to unacceptable levels, but we had assumed that growth would still ease to an average of 7.2% across the year as a whole.
Sustaining an average economic growth rate close to 7.5% would require the government effectively to suspend its efforts to rein in credit growth and borrowing by local authorities. While this remains a possibility, we believe that it is more likely that the government will instead break with precedent by allowing GDP growth to fall moderately below its target.
The Ministry of Finance also presented the government's budget at the NPC session, forecasting an 8% increase in revenue and a 9.5% rise in expenditure over 2013 levels. It was notable that officials plan to lift defence spending by 12.2%. Double-digit growth in defence expenditure has been the norm for many years; since 1989 growth has fallen to single digits in only one year, 2007. However, if actual spending follows the plans laid out in the budget 2014 would mark the first year since 2006 that defence expenditure rose faster than total public spending. Nonetheless, China's budget goals tend to be flexible, and the breakdown of spending and income by categories is hazy, so the figures should only be taken as a broad-brush indication of fiscal plans.

Impact on the forecast

We expect to raise our GDP growth forecast for 2014 from 7.2% to 7.3% in recognition that the mini-stimulus is likely to come earlier in the year than we had previously anticipated. We also expect to lower our forecasts for public spending and revenue growth slightly from their current levels of 10.8% and 10.7%, respectively.