China's New Normal: Managed Expectations

The main takeaway was the announcement that China will, as expected, set its GDP growth target at "around 7 percent." That's a "soft" goal that means China's leaders are willing to accept even slightly lower figures (China's soft target for 2014, for example, was 7.5 percent growth, but the actual growth rate of 7.4 percent was deemed acceptable). Analysts believe China's leaders would accept growth as low as 6.8 percent.

The lower growth target, which would mean China's lowest economic growth rate since 1990, is seen as an indication that China is embracing a "new normal" of slower and more sustainable growth. The new target "is both aligned with our goal of finishing the building a moderately prosperous society in all respects and is appropriate in terms of the need to grow and upgrade our economy," Li said.

However, if Li's remarks are any indication, China won't be too keen on growth slipping too much below this – in 2015 or beyond. Li mentioned that 7 percent growth "for a relatively long time" would allow China to "secure a more material foundation for modernization." Xinhua also cited Lu Feng, a professor at Peking University's National School of Development, as saying that the Chinese economy could maintain 7 percent growth – apparently the new benchmark for "medium-high growth" – for the next 20 years. Though it's moved away from the boom years of double-digit growth, Beijing continues to believe that relatively high economic growth is necessary to meet its development goals. A "new normal" of 6 percent growth or even lower seems out of the question.

http://thediplomat.com/2015/03/with-lower-growth-target-china-pushes-new-normal/

"China's economic development has entered a new normal," Li said. "Systemic, institutional and structural problems have become 'tigers in the road', holding up development. Without deepening reform and making economic structural adjustments, we will have a difficult time sustaining steady and sound development."

Speaking in front of nearly 3,000 appointed delegates to the congress, Li sketched out an expansive and lofty vision for fostering economic growth and improving the lives of China's 1.3 billion citizens.

He promised to add 10 million urban jobs, increase monthly pension payments to retirees by 10 per cent, build 7.4 million units of government-subsidised housing and construct nearly 5,000 miles of rail.

Yet much of his so-called work report to the nation focused on encouraging private enterprise, increasing consumer spending and lightening the heavy hand of a government that has long directed economic growth, at times squeezing out innovation and small businesses.

He repeatedly signalled the leadership's determination to reduce the nation's dependence on infrastructure construction - spending that economists have warned is often inefficient and unprofitable and that has helped lead to the worrying levels of debt accrued by local governments across the country. Instead, he said, China will make market forces and consumer demand its priorities.

"In expanding consumption, we need to ensure that every drop of spending builds to create a mighty river, so that the potential contained in an ocean of private consumers will be channelled into a powerful force driving economic growth," he said.

http://www.telegraphindia.com/1150306/jsp/frontpage/story_7173.jsp#.VPjWjIY76rU

China telegraphed this transition in 2010, when it published a five-year economic plan, but apparently very few oil traders paid attention. China's slower growth was one of the triggers for the rapid decline in oil prices since June, something that should have already been baked in.

The important thing now is to make sure we make rational investment decisions assuming that China will no longer soak up all the oil the world can pump. China has let us know that it alone will not be driving the price of oil back to $100 a barrel anytime soon.

Beyond the oil patch, though, China is Texas' third largest international market, buying $10.4 billion worth of goods in 2013. China buys $3.7 billion in chemicals alone, most of them produced in the Houston area.

China also buys $1.3 billion in computers, $1.2 billion in machinery, $777 million in waste and scrap and $739 million in petroleum and coal products.

A slowing Chinese economy means that exports to China will not grow as fast as they did in the past, when they doubled between 2005 and 2013. That's not to say China will stop buying Texas goods, but the growth will cool down.

http://www.houstonchronicle.com/business/outside-the-boardroom/article/China-s-new-economic-normal-will-hit-Texas-economy-6116729.php

Li stressed that China is positioning manufacturing as an area of strength and that the plan is aimed at getting a step ahead in key fields.

     Specifically, Beijing will seek to turn such areas as telecommunications networks, semiconductors, alternative energy, new materials, biotechnology, aircraft engines and gas turbines into leading industries that can succeed globally, according to Li.

     The government will provide financial support for the shift, setting aside a 40 billion yuan ($6.38 billion) fund for emerging industries and creating a private-equity market for small and midsize enterprises.

     Previous industrial promotion measures, which had been predicated on low labor costs, have started to run into problems. Manufacturers the world over had flocked to China, considered the world's factory, but the minimum wage has soared more than 50% over the past five years in such major cities as Beijing and Shanghai.

http://asia.nikkei.com/Politics-Economy/Policy-Politics/Plan-laid-out-to-become-manufacturing-powerhouse-by-2025