China Tweaks Growth Target Lower To 6%-6.5% From Last Year’s 6.6%

Against the setting of the National People’s Congress, which opened today, China’s leaders announced that the growth target for the economy in 2019 would be 6%-6.5%, down slightly from the 2018 target of 6.6%.

That dip is significant since the Chinese Communist Party will celebrate the 70th anniversary of the founding of the People’s Republic this year. The temptation to “go for the growth” in a celebratory year must have been tremendous. And it’s a sign of how constricting a box China’s economy is caught in.

On the one hand, the economy is definitely slowing. Cellphone shipments fell 13% in January. Car sales dropped 16% in January, for a seventh straight month of decline. The number of unsold houses is the highest in two years.

On the other hand, China simply doesn’t have the yuan to duplicated the stimulus splurge that lifted the country out of the Great Recession. After the global financial crisis hit in 2008, China launched a $586 spending program, fueled by debt, to get the economy moving again.The country spent $220 billion on transportation infrastructure alone. Now statistics say that China’s economy is getting less growth for each yuan of spending–the country has already invested in the projects with the best return on investment. And debt has climbed to $34 trillion or 244% of GDP.

Premier Li Keqiang tried to lower expectations for growth in 2019 in a 97 minute speech to 2,948 deputies gathered in the Great Hall of the People in Tiananmen Square. “Setbacks in economic globalization, challenges to multilateralism, shocks in the international financial market, and especially the China-U.S. economic and trade frictions, had an adverse effect,” he said. Li said it would be a “tough struggle” to get to the government’s forecast growth of between 6% and 6.5% this year. And he explicitly said that the government would not spend itself out of this economic hole. “Facing new circumstances and developments, we were firm in choosing not to adopt a deluge of strong stimulus policies,” he said.

The Shanghai market didn’t fall off a cliff in reaction to this news–the index was up 0.88% overnight–largely because this pessimistic tone and the lower growth targets have been widely expected. The Shanghai index is now up 16.65% in the last month.

And because there was some positive news on stimulus for the economy and the financial system below the headline announcement of the growth targets. The odds of a cut in benchmark interest rates climbed. (It would be the first cut since 2015.) There were mentions of a  targeted reserve ratio requirement cuts for banks. The planned fiscal deficit was raised to 2.8% of GDP, 0.2 percentage points higher than last year. Planned tax and fee cuts were set at 2 trillion yuan ($298 billion) for 2019, significantly higher than the 1.3 trillion yuan that was cut in 2018. Local governments’ special bond issuance quota was raised to 2.15 trillion yuan, a significant rise from last year’s 1.35 trillion yuan.

U.S. markets are listless today with, as of noon New York time, the Standard & Poor’s 500 index off 0.01% and the Dow Jones Industrial Average up 0.02%.

Oil prices, which follow expectations for global growth these days, were down with U.S. benchmark West Texas Intermediate lower by 0.23% to $56.46 a barrel, and international benchmark Brent down 0.17% to $65.56 a barrel