China plans to run its biggest budget deficit in 2015 since the global financial crisis, stepping up spending as Premier Li Keqiang signaled that the lowest rate of growth in a quarter of a century is the “new normal” for the world's No. 2 economy.
Speaking at the opening of the country's annual parliamentary meeting on Thursday, Li announced a growth target of around 7 percent for this year, below the 7.5 percent goal that was narrowly missed in 2014.
“The downward pressure on China's economy is intensifying,” Li told around 3,000 delegates gathered at the Great Hall of the People to the west of Beijing's Tiananmen Square.
“Deep-seated problems in the country's economic development are becoming more obvious. The difficulties we are facing this year could be bigger than last year.”
Outlining the government's policy priorities for 2015 in a Chinese equivalent of the U.S. State of the Union address, Li said there would be no let-up in an anti-corruption drive and vowed to fight pollution, which he called “a blight on people's quality of life and a trouble that weighs on their hearts.”
Stressing the need to put the economy on a more sustainable footing after three decades of breakneck growth, Li said priorities included pushing ahead with reforms of the giant state-owned enterprises that still bestride the economy and liberalizing the banking system and financial markets.
“In order to defuse problems and risks, avoid falling into the 'middle income trap', and achieve modernization, China must rely on development, and development requires an appropriate growth rate,” said Li. “At the same time, China's economic development has entered a 'new normal.'”
The annual full meeting of the largely rubber-stamp National People's Congress is a colorful event, drawing delegates from all over China, some in traditional ethnic costumes, to the vast hall, a monument to 1950s Communist architecture.
Its role is largely to endorse policy decisions already agreed by the party hierarchy.
In the short-term, China's top policymakers are grappling to sustain an economy weighed down by a cooling property market, high debt levels and excess factory capacity. Over the longer run, they are seeking to boost consumption to relieve overdependence on export markets and cut wasteful investment.
Underscoring the challenges faced in striking that balance, the People's Bank of China cut interest rates at the weekend for the second time in three months.
Adding a fiscal boost to the central bank's monetary support, Beijing plans to lift government spending to 17.15 trillion yuan ($2.74 trillion) in 2015, an increase of 10.6 percent on 2014.
That will mean raising the budget deficit to 1.62 trillion yuan, or around 2.3 percent of GDP, compared with 2.1 percent last year and the widest since 2009, when Beijing unleashed a stimulus splurge in response to the financial crisis.
Some of the extra money will be spent on railway and water projects and modernizing agriculture, although the chairman of the government's economic planning agency, Xu Shaoshi, said its investment plans should not be seen as a “massive stimulus.”
China's economy grew 7.4 percent last year, robust by global standards but still the slowest in 24 years.
With deflationary pressures mounting after a tumble in commodity prices, Li said China would also lower its 2015 inflation target to around 3 percent from 3.5 percent in 2014.
Market reforms, social stability
A key plank of China's reform agenda is tackling overcapacity in polluting heavy industries and moving its factories up the global value chain.
“Manufacturing is traditionally a strong area for Chinese industry,” said Li.
“We will implement the 'Made in China 2025' strategy, seek innovation-driven development, apply smart technology, strengthen foundations, pursue green development and redouble our efforts to upgrade China from a manufacturer of quantity to one of quality.”
Li promised a greater role for private business in the economy, which he said would be further opened up by halving the number of industries in which foreign investment is restricted.
A draft foreign investment catalog issued in November trimmed the number of sectors where China limits foreign investment to 35 from 79, but foreign business lobbies said that cut fell short of expectations.
“We look forward to seeing details of the revised catalog and streamlining measures, and share the premier's hopes for a stable, fair, transparent and predictable business environment in China,” James Zimmerman, chairman of the American Chamber of Commerce in China, said in response to Li's remarks.
With Communist Party leaders ever mindful of social stability, Li said China aimed to create more than 10 million new jobs in 2015 and would ensure the jobless rate does not exceed 4.5 percent. China targeted a registered urban unemployment rate of 4.6 percent last year.
The fight against pollution and corruption have contributed to the slowing economy, as Beijing has clamped down on dirty industries, and the fear of being caught in the anti-graft net has had a chilling effect on some business activity.
But in the longer term, the Communist Party leadership regards tackling the twin side-effects of China's decades-long dash for growth as vital to maintaining its grip on power.
“Our tough stance on corruption is here to stay,” said Li. “Our tolerance for corruption is zero, and anyone guilty of corruption will be dealt with seriously.”