The government of China is willing to tolerate growth as slow as 7 percent, signalling it will act to support expansion if needed, Beijing News reported yesterday.

China

To achieve a “moderately prosperous” society by 2020

Premier Li Keqiang said at a meeting with economists this week that the rate would be the “bottom line” and the nation could not allow any slower pace, the Beijing News reported.

Meanwhile, a commentary published by Xinhua news agency said expansion below that rate would not be tolerated because China needs to achieve a “moderately prosperous” society by 2020.

Hong Kong-based Barclays economist Chang Jian, who formerly worked for the World Bank, said: “The comments confirmed that the government’s acceptable range for growth this year is between 7 and 7.5 percent. As economic growth is slowing to below 7.5 percent, the government policy’s focus is gradually shifting to stabilizing growth.”

Natixis : How can we interpret the bottom line

Li stressed the bottom line for growth is 7.0 percent and such bottom line is allowed to be crossed, to achieve the goal of doubling the 2010 GDP by 2020. Li also mentioned that the lower limit for growth is 7.5 percent and the upper limit for inflation is around 3.5 percent.

According to Luca Silipo and Jackit Wong of Natixis So, how can we interpret the bottom line, the lower limit and the upper limit?

Stressing the bottom line for growth at 7.0 percent should probably help dampen market speculation about a hard landing scenario, and restore market confidence. Such bottom line is unlikely to be tested this year, so it will remain less likely to see an aggressive policy shift to boosting growth.

The lower limit for growth at 7.5 percent, which from Natixis cautious optimism is still quite possible to exceed this year, mainly supported by improving domestic consumption and investment, with downside risks stemming from sluggish trade activity, amid a modest improvement in external demand and the loss of China’s export competitiveness.

The upper limit for inflation at 3.5 percent, which from Natixis perspective is unlikely to be tested this year (given the half year average inflation was still at +2.4 percent), should allow room for monetary policy fine-tuning, if needed. Fine-tuning may not necessarily mean to adjust banks’ reserve requirement ratio (currently at 20.0 percent) or 1-year benchmark lending rate (currently at 6.00 percent), while it could point to a further interest rate liberalization, for example, to increase the ceiling on banks’ deposit rates gradually (instead of onestep abolishment, given the PBoC’s cautious stance).

Also see China GDP to Dip Below 7 Percent Amid Pain Of Liberalization: SocGen

Too much of an economic slowdown in China may lead to high unemployment

China’s new leaders are pursuing a longer-term vision of reforming the economy towards consumer-driven, rather than export- and investment-led growth.

Also see China’s New Premier Signals Banking Reform, Faces Resistance

Beijing is also still cleaning up trillions of yuan in local government debt left over from its last spending spree during the 2008/09 global financial crisis, while trying to rein in off-balance-sheet loans.

But the main worry for China’s leaders is that too much of an economic slowdown may lead to high unemployment that could spark social unrest. So far, government officials have said that employment remains stable and, as a result, many economists do not foresee any major stimulus or policy shift, instead expecting Beijing to tough out the slowdown.