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China's state planner says "effort" needed to meet targets

China's state planner says

China's state planning agency has warned policymakers that the economy will face pressure from increasing economic headwinds during the second half of the year and that additional "effort" is necessary to ensure the achievement of development goals.

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By Meili Chen 30.08.2018

China’s state planning agency has warned policymakers that the economy will face pressure from increasing economic headwinds during the second half of the year and that additional “effort” is necessary to ensure the achievement of key development goals.

China has now been engaged in a two-month-long trade dispute with the US, and Chairman of the National Development of Reform Commission He Lifeng said on Tuesday that the possibility of the standoff intensifying could weigh down the economy. In addition to this, other domestic and global factors will simply add increasing pressure.

“Targets in economic growth, employment, inflation and exports and imports can be achieved through effort,” He Lifeng said in a speech to the National People’s Congress. “But to achieve growth goals in consumption, outstanding total social financing and urban disposable income will require bigger effort.”

China’s economy was already showing signs of slowing down before trade tensions with the US intensified earlier in the summer. Investment growth has recently slumped to a record low, and consumers have tightened their purse strings and are less likely to splurge on luxury goods.

Beijing has made moves to prevent a sharper slowdown with increased spend on infrastructure and financial assistance for small and medium enterprises, but policymakers are worried that similar measures could increase China’s debt levels, which have yet to fully recover from stimulus binges in the past.

Analysts expect the government to drive domestic demand to offset a potential downturn in exports as the impact of the trade war and geopolitical tensions filters through to the economy. However, property prices are now on the rise, so soaring household debts may make consumers even more cautious about spending. Data shows that the growth of disposable income has already been cooling.

Policymakers are still confident that they can hit a retail sales growth target of 10% for the full calendar year, even though they have only hit this level once so far in 2018. The recent cooling trend also extends to sales, as growth during the latest quarter has been the softest for 15 years.

“There are greater headwinds in the second half [of] this year with some targets under threat,” Capital Economics Senior China Economist Julian Evans-Pritchard said. “But I don’t get from today’s statement that they have decisively moved to the easing direction. I don’t think the tension between the two goals – one is the deleveraging campaign, the other is meeting the economic growth target – has been resolved yet.”

He Lifeng has pegged the recent difficulties on two primary factors – external risks and long-term structural changes. China is also at a crossroads on trade, according to He Lifeng, who believes that diversification is important for overhauling export markets and boosting imports.

There was hope that a meeting in Washington last week would lead to some sort of progress on trade, but that did not come to fruition, and the lack of a breakthrough occurred as the latest round of tit-for-tat tariffs went into force. The Trump administration is reportedly eager to bring in even more tariffs next month, so any resolution remains unlikely.

He Lifeng also said that China will remain committed to lowering debt levels and mitigating financial year risks but that the current economic situation means that it will have to exercise more control and intensity of those efforts. This follows the central bank’s pledge that it will not pursue a strong stimulus to support growth.

It appears that authorities will be watching markets closely during the coming months. He Lifeng concluded: “China is determined to resolve problems with the property market...and resolutely curb rises in property prices.” 

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