Fra Zerohedge
With fears mounting over China’s debt load sustainability, and amid yet another liquidity crisis, President Xi Jinping appeared to admit that China’s economic growth will slow below the government’s 6.5% target. Despite the promise of creating a “modestly prosperous society,” Xi warned that China doesn’t need to meet the objective if doing so creates too much risk – a little late for that after trillions of freshly created credit was spewed into zombified firms this year – but at least reality is starting to set in.
Last year’s 6.9 percent expansion was the slowest in a quarter century. For this year, the government set a 6.5 percent to 7 percent target range, slower than last year’s goal of about 7 percent. IMF Managing Director Christine Lagarde said earlier in February that the fund strongly recommended that China set a growth target range of 6 percent to 6.5 percent.
As Bloomberg reports, too much emphasis on meeting growth objectives is increasing financial risk, according to Huang Yiping, an adviser to the People’s Bank of China. The higher the short-term growth target, the more difficult it will be to rebalance the economy to favor long-term growth, Huang, an economics professor at Peking University, said at an event this week in Beijing.
Xi told a meeting of the Communist Party’s financial and economic leading group this week that China doesn’t need to meet the objective if doing so creates too much risk, said the person, who asked not to be named because the discussions were private. Leaders at the gathering agreed that the $11 trillion economy would remain stable with slower growth as long as employment stays firm, the person said.
The shift signals that leaders see systemic risk as great enough to warrant re-evaluating key goals and may be less inclined to add to fiscal and monetary stimulus. Xi consolidated his power in October, ahead of a twice-a-decade leadership reshuffle next year, with the party naming him its “core.”
Some meeting participants sounded the alarm about unsustainable debt, noting that other nations have experienced crises after borrowing climbed to around 300 percent of GDP, the person said. China’s debt-to-GDP ratio rose to about 270 percent this year, the person said. The source of the ratio was unclear.
And while Yuan is limping lower (very thin holiday trading), the biggest impact for now is evident in the Aussie Dollar…
So as the currency wars rage quietly beyond the CNBC headlines, Trump’s appointment of Navarro may have been just the warning shot across China’s bow that prompted this reality-awakening in Xi.
Rising populist sentiment in the U.S. and Europe pose another risk for Xi’s government, which has warned of the dangers of a trade war. Xi also warned China should avoid the so-called Thucydides Trap, the person said, referring to the theory attributed to the eponymous ancient Greek philosopher that says a rising power will clash with an established force.
Trump has threatened to slap tariffs on Chinese products while also questioning the U.S.’s policy on Taiwan, which Beijing considers its territory. Frothy property markets and a falling yuan also pose challenges to the economy.
