Lower Chinese growth target gives world markets the jitters
Tuesday 06 March 2012
Chinese premier Wen Jiabao sent tremors through global markets yesterday, as the world's biggest economy set its least-ambitious growth target for eight years.
Mr Wen's announcement to China's People's National Congress will see Beijing target annual growth of 7.5 per cent in 2012, down from the 8 per cent goal which has been in place since 2005.
The scaling back of China's growth ambitions hit shares as well as commodities such as copper and natural gas, amid worries that China's ravenous demand for raw materials is now set to tail off.
Miners bore the brunt of the damage in London as the CMC Markets analyst Brenda Kelly said: "The basic resource and mining sector is the worst hit as investors worry about demand concerns."
Effectively, China's growth target acts as an absolute minimum floor for growth, with most analysts pencilling in an expansion of around 8 per cent for the economy this year.
But growth of 7.5 per cent would represent the weakest growth in 20 years – potentially fuelling political discontent and posing a threat to the country's autocratic leadership.
But a lower growth target also gives Beijing some economic leeway to rebalance its economy and defuse inflationary pressure, meaning that interest rates can stay lower to maintain a steady flow of credit to the small businesses the Chinese government wants to encourage.
"We aim to promote steady and robust economic development, keep prices stable, and guard against financial risks by keeping the total money and credit supply at an appropriate level, and taking a cautious and flexible approach," Mr Wen said.
The premier added that "expanding consumer demand" is China's first priority for 2012, as it attempts to wean itself off exports, heavy industry and huge infrastructure spending as the main drivers of growth.
His declaration will be welcomed by deficit nations in the West frustrated by Beijing holding down the value of its currency to protect export markets.
But China also faces a year of political change as Mr Wen and President Hu Jintao prepare to retire next year, raising doubts among some analysts over the extent of proposed reforms.
The Macquarie Bank economist Paul Cavey said: "It seems very unlikely there will be huge progress on structural reforms given the political transition.
"The slower growth numbers just reflect the reality that growth is going to be slower because the rest of the world is going to be weaker."
But Mr Wen said boosting domestic consumption would be "crucial" to China's future as its tradition exports in the West falter under the burden of deficit-reduction programmes and the eurozone debt crisis.
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