Capital Economics: Chinese authorities should lower growth target for 2015

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Ahead of next week’s Economic Work Conference in China, Capital Economics forecasts Chinese GDP growth to slow to 7.3 per cent in 2014 and 7.0 per cent next year.

China’s leaders meet in Beijing next week for a two day conference to discuss priorities for 2015, with there being some speculation the economic target for next year will be announced shortly after. However Capital Economics’ chief Asia economist Mark Williams says this most likely will not happen, with it only being made public at the National People’s Congress in March.

 “Another ‘about 7.5 per cent’ target is not out of the question for 2015 but seems unlikely,” Williams says. “Growth for this year already looks set to fall towards the lower end of the range implied by ‘about 7.5 per cent’ (our forecast is 7.3 per cent). Trying to prevent is slipping any further would hurt efforts to address credit risks and structural imbalances.”

Despite the economic slowdown in 2014, Williams notes China’s labour markets has proved to be remarkably resilient. This, he says, supports Capital Economics’ view that as China’s economy shifts towards the more  labour-intensive service sector, lower growth rates will be sufficient to maintain healthy employment growth.

He says: “With the labour market now their primary concern, policymakers should therefore fell comfortable lowering their growth target for next year, most likely to ‘about 7.0 per cent’.”

Capital Economics’ forecasts GDP growth of 7 per cent in China for 2015, which is slightly below the analyst consensus of 7.1 per cent.

Meanwhile after the recent rate cut by the People’s Bank of China, Williams expects two more cuts to benchmark lending rates by the middle of next year, as well as liquidity injections, in the form of RRR cuts, in order to bring down market interest rates. He says the first RRR cut could come before the end of this year.

However Williams cautions people do not read too much into these cuts.

“We do not see the recent benchmark rate cut as the start of a new easing cycle similar to that in 2008,” he says. “Interest rates are likely to fall but we believe that the PBOC will stop short of driving a sustained rebound in credit growth, unless the economy and labour market deteriorate markedly.”