Moving to a new reality

Wen Jiabao’s announcement at the annual session of the National People’s Congress (NPC) that China’s growth target was being cut to 7.5 per cent is political savvy. Particularly so coming at a time when the world’s second largest economy is considering its options in a more challenging context with falling demand for exports in major markets and the slow pace of the growth of domestic demand.

Wen’s government has not had a very good record in forecasting growth. The stimulus package launched at the end of 2008 sent expansion spiraling out of control, not so much on account of the infrastructure programme as because of the huge credit easing that followed in 2009-10. Now monetary policy is being brought under control; the aim is to restrict the expansion of monetary growth this year to 14 per cent.

New loans in January were below expectations. Beijing is still bent exercising the control it lost three years ago. There was no mention at the NPC session of lifting restrictions on the property market which we expect to stay in force until the middle of the year.

The 7.5 per cent forecast is in line with our reports at the end of last year and earlier postings on this. Data for 2012 is skewed by the Chinese New Year falling in January this year rather than in February as last year. Overall, the first quarter number are likely to be bad though, as so often, there are contrary current in the shape of more positive PMI reports for the start of 2012.

Wen’s report and the government budget make plain the concern felt at the top over social stability – spending on internal security has increased by 11.5 per cent in the 2012 budget and remains above the amount set aside for the armed forces (even if the figure for the military is under-stated).

What is emerging is a picture of an administration which is recognizing the extent of the challenges facing it on many fronts as it moves into the leadership transition later in the year. That is producing an outbreak of calls for structural reform and attacks on “vested interests” which we analyzed in a research report this week. The World Bank has called for change and I was interested to be invited to write an article about the need for change by the state English-language newspaper China Daily last week.

Whether this proves to be a flash in the pan, as reform initiatives have been so often in recent Chinese history, remains to be seen. But, taken with the Bo Xilai saga which we wrote about last month and which is far from finished, suggest that the permafrost of Chinese politics is being fractured by economic and social pressures, and will make 2012 a year to watch.