China plans for slightly slower growth in 2018

Meeting in Beijing today, the National People’s Congress approved plans laid out by President Xi Jinping and Premier Li Keqiang to set the target for economic growth at 6.5% for the next year and to reduce the government deficit to 2.6% of GDP from the 3% of the last two years. The government didn’t announce a target for growth in the M2 money supply, instead promising to keep it level with last year’s growth.

All this points to a modest slowdown in growth in the Chinese economy for the next year. The government is expected to continue its campaign of targeted deleveraging that focuses upon pressing deeply indebted companies to reduce their debt levels. (Which is good news for investors since it argues that China will not use the blunt tool of a economy-wide credit squeeze to accomplish its deleveraging goal.)

If you put together spending at the national and local levels (and include off-balance sheet spending), government policy will be modestly expansionary with the total fiscal deficit at about 10% of GDP. That would be lower, however, than the International Monetary Fund’s estimate of a 12.6% total deficit for 2017.

Growth in 2017 finished above the official target at 6.9%. Economists are projecting the China’s economy will growth by 6.5% in 2018, hitting the government’s target, and then slow to 6.2% growth in 2019.

The government did announce increased spending to fight pollution (a 18% increase), tax cuts of 800 billion yuan for companies and individuals, and an 8.1% increase in defense spending (the biggest increase in three years.) The government also pledged to cut 30 million tons of steel capacity in 2018. That’s a slightly lower target than the 50 million goal in 2017. (Remember these are target cuts. China is notorious for not meeting targets to cut capacity with local officials interested in preserving local jobs frequently frustrating national policy goals.)

Other targets include growth in retail sales of about 10%, a 3% increase in consumer prices (the same level as in 2017), a stable exchange rate for the yuan, and the creation of 11 million new urban jobs (the same level as in 2017) with the registered urban unemployment rate at 4.5% (unchanged from 2017. The Chinese system of using unregistered workers who have migrated from rural areas to fill urban jobs means that the “registered unemployment rate” is, essentially, anything the government says it is.)

For investors trying to get a grasp on the trend in global trade, these targets suggest that China’s economy will show lower growth in demand for commodities than in 2017, and slightly slower growth in imports. Nothing in these numbers suggests that–all things on the global trade front being equal–that global trade and the global economy are about to fall off a cliff.