Reform tests the flexibility of China's economy


The sliding minimum level of GDP growth, the disappearance of the government's resolute wording on maintaining minimum growth rate and the meager percentage of the projected fiscal deficit underscored in the economic section of the Government Work Report delivered on March 5 deserve prudent analysis.

Sliding growth at around 7 percent is set with no guarantee

The Chinese government has lowered its expectation for economic growth for the first time since the economic downward spiral started to affect China in 2012, cutting half a percentage point from the previous set rate to 7 percent. However, unlike the Government Work Report in 2014, the report delivered on March 5 at this year's ongoing Two Sessions did not include a single line to ensure the market that the government is resolute about maintaining growth and keeping the employment rate above the minimum level.

Because the "minimum level" rhetoric had always been a clear signal of some certainty in economic policies, the abandonment of such wording together with the presumption of a lower growth rate reveals the government's attempt to sound out the exact bottom of the national economy. Therefore, two possible ramifications of this year's economic policies need to be noted.

First, although the government will certainly not accept an unstable economy, it may not be able to respond in a timely fashion to unexpected consequences, such as the deterioration of factors that affect economic growth or a hard landing, consequences that are very likely to happen when the government is tiptoeing along the bottom line.

Second, without the government's assurance that minimum levels will be maintained, the market should be more discreet when betting on the government's readiness to carry out policies to stabilize the economy.

Monetary and housing policies will be loosened by a low fiscal deficit

According to the report, the fiscal deficit will be set at 1.62 trillion yuan (US $258.7 billion), accounting for 2.3 percent of GDP, a proportion slightly higher than last year's 2.1 percent. But this is obviously insufficient considering local governments' financing platforms, which have dwindled over recent years due to concerns of ballooning debt risks. Therefore, local governments are in need of a huge influx of money to maintain steady growth of funding for infrastructure. But the fiscal deficit budgeted this year also shows no signs of change in the government's package of tightened fiscal and loosening monetary policies which was drawn up in the second half of last year. The low deficit will force the relevant authorities to keep adopting loosening monetary policies while easing restrictions on the housing market.