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Politics Push China to Prioritize Economic Growth Over Reform This Year

5 Mar 2017 3:56 pm
By Mark Magnier 

BEIJING -- In a sensitive political year, China is enlisting old economic growth drivers, betting it can contain mounting financial risks and postpone some painful overhauls.

Premier Li Keqiang laid out the blueprint for the Chinese economy to the National People's Congress, acknowledging the downward slope for growth -- the "new normal" that has been the leadership's slogan for years. A small calibration of the growth target set it at "about 6.5%" rather than last year's range of 6.5%-7%.

But he made it clear that even one notch below 6.5% would be a disappointment and that it should be higher if possible.

China has been criticized by the World Bank and others for lofty growth targets that push up debt levels. Mr. Li said in his annual speech to the legislature that China has many "innovative tools and policy options" and assured the 3,000 lawmakers in Beijing's Great Hall of the People that the target is realistic.

He played down concerns over companies' debt burden, which now stands at 160% of gross domestic product, saying China has the "confidence, the ability, and the means to forestall systemic risks." He set a target for credit growth this year of 12%.

Politics dictates that economic growth take priority over any reform effort this year. The Communist Party will set a leadership slate at the end of the year for the next half-decade -- and there is little tolerance for instability that could disrupt President Xi Jinping's second-term mandate.

Mr. Li's policy address on Sunday mentioned Mr. Xi eight times, a shout-out for a serving leader only surpassed 40 years ago, when the policy speech contained 17 mentions of Mao Zedong.

The looming power shuffle has placed a premium on avoiding risk.

To keep a floor under growth, Beijing is turning to traditional sectors, despite its stated goal of shifting the economy toward services and high-tech industry.

Mr. Li offered a two-prong effort to wring more momentum from the property sector. It accounts for an estimated 15% of China's economy, but has seen distortions such as smaller cities struggling with lots of unsold apartments, while in megacities speculation has driven prices out of reach for ordinary people.

Housing, the premier told the rubber-stamp legislature, "is for people to live in."

Mr. Li said the central government plans to release more land for residential development in such cities as Beijing and Shanghai, and to help spur demand in smaller cities. He didn't elaborate; past efforts have included mortgage incentives and looser residency requirements.

The 2017 fiscal deficit target of 3% of economic output suggested China will continue rolling out public-works projects to prop up growth. While the target matched last year's, the actual deficit in 2016 reached 3.8% of output and economists expect it will overshoot again.

On Sunday, Beijing announced several hundred billion dollars' worth of additional highway and railway projects.

Mr. Li alluded in his speech to the pain of restructuring, though he also promised to follow through on paring bloated industries.

Raising the bar for China's much-criticized overproduction of steel, he set capacity cuts of 50 million tons. He also pledged to close dozens of polluting coal plants and stop some new mine construction, in the process trimming capacity by an amount bigger than South Africa's entire annual output.

Such overhauls have been slowed by concerns of destabilizing layoffs. But especially on coal, China needs to reduce its use to fulfill its carbon-cutting promises to the United Nations.

China's labor minister pledged last week to trim another 500,000 workers from the steel and coal industries this year, compared with 726,000 workers last year.

Mr. Li didn't mention U.S. President Donald Trump, who has threatened to take China to task over its trade practices, but his shadow loomed as the premier cited challenges from rising global protectionism. In January, the Trump administration pulled out of the Trans-Pacific Partnership, all but killing the trade pact that had excluded China.

Beijing's recipe in the face of "uncertainties" about the direction of other major economies, Mr. Li said, is to push ahead with regional trade agreements. He called for rapid progress on a narrower, China-backed trade agreement, the Regional Comprehensive Economic Partnership.

The push-and-pull over economic policy has exposed divisions within the leadership. Party insiders have said Mr. Li may be moved out of the premier's position during the leadership changeover this year to make way for an official closer to Mr. Xi.

The government's information office has declined to answer questions about personnel changes or alleged differences between the two men.

Mr. Xi's own second term is all but guaranteed. But some warned that as his power expands, that also leaves him more exposed.

"In China, the more powerful you become, the more risk you take," said National University of Singapore politics professor Huang Jing. "If something goes wrong now, he gets the blame."

Write to Mark Magnier at mark.magnier@wsj.com
 

(END) Dow Jones Newswires

March 05, 2017 10:56 ET (15:56 GMT)

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