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Beijing assigns itself hard economic homework

Beijing assigns itself hard economic homework
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HONG KONG, March 7 (Reuters Breakingviews) – Chinese leaders have set themselves a tough task in 2022. With the war in Ukraine destabilizing global asset prices, the government still plans to grow gross domestic product by “around” 5.5% read more in 2020 , which implies nearly $1 trillion in new output. Achieving that will require big fiscal outlays, retreats on campaigns against property speculation and carbon emissions, plus deep interest rate cuts.

The 5.5% target overshoots the International Monetary Fund’s 4.8% forecast. Some economists had projected the country’s actual growth would come in closer to 4% — and that was before Russian troops attacked. The number appears to reflect a rule of thumb in Beijing that every percentage point of GDP expansion generates 2 million new jobs. Over 10 million college graduates will hit the market in June, while property and internet companies are laying off swathes of staff after last year’s regulatory crackdown.

Other headwinds are rising. Robust export demand that compensated for weak domestic consumption last year looks to ebb, yet Beijing is hesitating to soften its so-called zero-Covid policy which has depressed shopping and tourism. In this context, if officials want to hit their target, they have no choice but to fall back on growth drivers they’ve been trying to leave behind: infrastructure and property investment, the latter of which drives between a quarter and a third of GDP . That means more pollution from cement, steel and coal industries.

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Yet local government officials are struggling to find new infrastructure projects that produce positive returns instead of underperforming loans. Tellingly, perhaps, Premier Li Keqiang’s work report submitted on Saturday omitted a popular line about “resolutely curbing local government hidden debt”.

Given property bubbles and the US Federal Reserve’s inclination to hike rates, the People’s Bank of China has been reluctant to ease aggressively or engage in “flood-like stimulus”, much less relax its deleveraging campaign. But if the government is to deliver 5.5%, it cannot do it not with fiscal juice. It will have to lower borrowing costs for companies too. Yet in recent years cutting rates has proven less effective at stimulating productive investment than attracting property speculators. With economic rising uncertainty and markets volatile, this target will be good for morale, but bad for financial discipline. Either way, it’s one goal China might miss.

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CONTEXT NEWS

– China is targeting economic growth of around 5.5% this year, Premier Li Keqiang said in his annual work report to the annual session of parliament on March 5. In 2021, China’s GDP expanded 8.1%, compared to the government’s annual target of above 6 %.

– The government also set other economic targets, including creating at least 11 million urban jobs, and a fiscal budget deficit around 2.8% of gross domestic product.

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Editing by Pete Sweeney and Thomas Shum

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