China to endorse lower five-year growth target at key meeting next month

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China’s leaders are poised to endorse a lower economic growth target for Beijing’s next five-year plan compared with 2016-2020, as authorities navigate growing challenges fueled by a deepening rift with the United States, policy sources said.

President Xi Jinping and other leaders are expected to discuss and approve China’s economic and social development blueprint for 2021-2025 at a key Communist Party conclave in October, probably in the second half of the month, the sources told Reuters.

Policymakers believe that setting a five-year growth target is vital for steering the world’s second-largest economy past the ‘middle income trap’, the sources said, after internal debate over whether it should abandon such targets to enable more flexibility.

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The target also keeps local governments focused on development goals at a time of a deepening rift between China and the United States over a broad range of issues, they said.

“There will be an economic target. Where is the direction of development if there is no such anchor?” said one source who is involved in the debate.

Government think tanks and economists have made recommendations for average annual gross domestic product (GDP) growth targets including “around 5 percent”, 5-5.5 percent to 5-6 percent, the sources said.

China is targeting average annual growth of over 6.5 percent for the 13th five-year plan that ends this year.

China’s State Council Information Office did not immediately respond to a request for comment.

Some government advisers have argued that China should do away with official growth targets - a legacy of decades of central economic planning -- to reduce reliance on debt-fueled stimulus and encourage more productive investment.

Reform advocates hope President Xi’s proposed “dual circulation” strategy, expected to be the centerpiece at the conclave, is an opportunity to quicken reforms to spur domestic demand and unleash fresh growth engines.

In May, China abandoned its annual GDP growth target, for 2020, for the first time in 18 years due to a heavy blow from the coronavirus crisis, although some economists suspected the government has maintained an implicit goal of around 3 percent.

The five-year plan is expected to be unveiled at the annual parliament meeting in early 2021. A growth target for 2021 itself, also to be unveiled at the parliament session, is likely to be set by top leaders at an annual economic conference in December.

“We expect the government to either not set an explicit growth target or set a lower and more flexible (e.g., around 5 percent) growth target” for 2021-2025, analysts at UBS said in a note to clients.

‘Critical period’

China faces growing headwinds to maintain its ascent as the United States ratchets up pressure on trade, technology and other fronts, threatening a decoupling of the world’s two largest economies.

Annual growth of about 5% would be enough for China to bypass the “middle income trap” that has befallen countries such as Argentina, Brazil and South Africa, which have struggled to boost productivity and shift towards higher value-added industries.

The World Bank defines high-income countries as those with per capita gross national income (GNI) of above $12,535. China’s per capita income reached $10,410 in 2019, according to the World Bank.

The State Council’s Development Research Center, the cabinet’s think tank, said in a recent report that it expects China to become a high-income nation by 2024 and overtake the United States as the world’s largest economy by 2032.

“The 14th five-year plan period will be a critical period for China to deal with frictions with the United States and make strategic arrangements,” the think tank said in the report.

Analysts expect China’s GDP to grow 2-3 oercent in 2020, the weakest since 1976, but growth could rebound to over 7 percent in 2021 thanks to a lower base, but the longer term trend is for slower growth as the population ages and the economy matures.

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