Dropping growth target, China concedes severity of economic obstacles

Officials want to prioritize employment over raw GDP growth

Under leader Xi Jinping, China has established itself as an increasingly assertive global player, pushing back forcefully against challenges at home and abroad.

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But even as Beijing tightens its grip on Hong Kong and steps up its rhetoric against the U.S., senior leaders bowed to the inevitable on Friday, acknowledging the scope of the challenges facing the economy -- the bedrock of much of the country's recent strength.

On Friday, Premier Li Keqiang abandoned the country's annual gross domestic product target for the first time in more than a quarter-century, citing "factors that are difficult to predict" -- most notably the coronavirus pandemic and uncertainties around trade.

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Mr. Li and his fellow Chinese policymakers are portraying the decision as a liberating one. Mr. Li said the lack of a growth target would enable them to focus on ensuring stability and security.

There is an element of truth there. China's economy is slowly plateauing after an extended run of world-beating growth, and leaders have in recent years de-emphasized explicit growth targets anyway, increasingly regarding them as burdensome.

U.S President Donald Trump, left, and Chinese President Xi Jinping

In March, Mr. Li called on officials to prioritize employment over raw GDP growth, underscoring the senior leadership's concerns about social instability. "As long as employment is stable this year, it's not that big of a deal whether the economic growth rate is a bit higher or lower, " Mr. Li said.

"This year could be a turning point for Beijing to further downplay the GDP target," said Liu Li-Gang, chief China economist at Citigroup. "We are likely to see this trend extend into the future."

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Even so, dropping the GDP target for the year, long the lodestar of Chinese economic policy, is a humbling moment, forcing Mr. Xi to give up on one of the Chinese leadership's most vaunted political goals: to double the economy's size from a decade earlier ahead of next year's centennial of the Chinese Communist Party's founding.

Officials have already begun to lower expectations. He Lifeng, the head of China's main economic-planning body, told reporters Friday that even meager GDP growth this year of 1% would expand overall GDP by 1.9 times from a decade earlier -- not quite double, but close enough.

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"Beijing is taking a more realistic and humbler approach by omitting a growth target this year amid so many uncertainties," said Betty Wang, an economist with ANZ Research.

Ultimately, the scrapping of the GDP target serves as a blunt reminder of the magnitude of the many risks that loom over China's economy in the coming months.

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While China claimed success in stamping out the initial outbreak of the coronavirus, which was first detected late last year in the central city of Wuhan, authorities have struggled to prevent continued outbreaks around the country and haven't loosened tight restrictions on international travel.

Epidemiologists have warned about a potential reemergence of infections in the fall, which could force authorities inside and outside China to keep their economies on lockdown for longer than expected.

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Then there is the other great uncertainty: a tense and quickly deteriorating relationship with the U.S., the world's largest economy, as the two sides fight over trade, technology and the origins of the coronavirus.

In the past week alone, President Trump has moved to tighten restrictions on doing business with Chinese telecommunications giant Huawei Technologies Ltd. and threatened to tear up the phase-one trade deal with China. At the same time, he has offered vocal support for Taiwan President Tsai Ing-wen, whose government, reviled in Beijing, began a second four-year term on Wednesday.

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The danger for China is that the U.S. could take further steps to pinch China's economy, particularly as emotions run high on Hong Kong, and Mr. Trump and his Democratic challenger, Joe Biden, vie to establish themselves as the toughest candidate on China.

"The uncertainty is too big, especially given the U.S. election later this year," said Ding Shuang, an economist at Standard Chartered. "It'll be awkward if they set a growth target and couldn't reach it."

Just hours before Mr. Li's policy address in Beijing, U.S. senators from both parties began drafting legislation to sanction Chinese officials and entities involved in enforcing the new national-security laws in Hong Kong and punish any banks doing business with them -- a move that could snarl China's financial system.

"The uncertainty is just too big. It'll be awkward if they set a growth target and couldn't reach it."

- Ding Shuang, economist, Standard Chartered

With so many uncertainties, Chinese policymakers aren't just struggling to forecast a growth target for the year. They are also holding back on stimulus, raising the fiscal deficit target to 3.6% or more of GDP -- a new high -- but falling short of the kind of forceful "all-in" stimulus that characterized their response to previous downturns.

"It's a relatively modest package," said Zhu Haibin, an economist at J.P. Morgan, who described China's fiscal stimulus package as falling in the middle of the pack as far as global responses go. As a result, Mr. Zhu expects the Chinese economy to grow by 1.3% in 2020, the worst full-year performance since Mao Zedong's death in 1976.

To be sure, if the situation deteriorates further, policymakers may be forced to ramp up stimulus, said Larry Hu, an economist at Macquarie Group. As it stands, he said, China's other economic targets this year -- to create more than nine million urban jobs and keep urban unemployment below about 6% -- are ambitious enough, given the myriad uncertainties.

"Chinese authorities don't have to defend the GDP growth target any more, " Mr. Hu said, "but they are still under pressure."