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Chinese Premier Li Keqiang will announce China's latest growth target March 5.   © Reuters
Economy

To get inside Beijing's head, look at the numbers

Fiscal deficit, regional debt show costs of growth

SHANGHAI -- As China gears up for its annual legislative session, all eyes are on the economy: specifically, how fast the Communist leaders intend China to grow, and what they are willing to sacrifice for that goal.

The most hotly awaited event of the National People's Congress will come on March 5 -- opening day -- when Premier Li Keqiang will announce the government's economic growth target for 2017. Many expect a downgrade from 2016's goal of 6.5-7% to "around 6.5%," according to a major bank.

Beijing aims to bring China's gross domestic product to twice the 2010 level by 2020 -- a goal frequently, and mistakenly, taken to be merely an aspirational target. President Xi Jinping has called for the eradication of poverty in China by 2021, the hundredth anniversary of the Communist Party's formation, and pledged a "great revival of the Chinese nation." In this context, missing the mark could mean the leader's downfall.

Doubling GDP over a decade requires 7.2% annual growth on average. Rates that were higher than that from 2011 to 2014 mean the country has only to hit 6.3% during the next few years. Targeting 6.5%, and thus avoiding a steep drop-off from last year's goal, is a clear attempt to avoid any possible misstep ahead of the party's twice-a-decade National Congress this autumn, when the group will name its next slate of leaders.

Keep spending

But in today's China, 6.5% is no slight hurdle. To be sure, exports are recovering thanks to a brisk U.S. economy and a yuan some 10% weaker than at its peak. But areas outside major cities remain mired in vacant housing stock, and private investment is sluggish, leaving public works as one of the only viable drivers of growth.

The government foots the bill, of course. In 2017, China's fiscal deficit could swell to 3.5% of GDP, economist Zhu Baoliang at the State Information Center, a government-affiliated think tank, was quoted as saying late last year in the 21st Century Business Herald.

China's deficit crossed the 2% threshold in 2015. The initial budget for 2016 would have kept it on that level. But additional stimulus policies hatched mid-year are thought to have kicked the figure up to 3%. That further expansion is considered inevitable underscores the basic fact of China's economic weakness.

By some accounts, a deficit in the 3% range would cause few real problems. The country runs a current-account surplus, albeit one that is shrinking, and has nearly $3 trillion in foreign currency reserves. But this leaves unmentioned a third sign of China's distress: the growing pile of regional government debt.

Consequences

China's regional governments are thought to have owed more than 17 trillion yuan ($2.47 trillion at current rates) at the end of 2016. At the People's Congress, Beijing is widely expected to give the okay to a figure in excess of 18 trillion yuan. After all, the central government put up slightly more than 1 trillion yuan for China's 4 trillion yuan stimulus package in the wake of the global financial crisis, and called on its regional counterparts to shell out in excess of 2 trillion yuan. This led to out-of-control building as regional governments sought revenue from land sales to fill the gap, sending up hordes of uninhabited apartment units across the country -- a process leaders do not wish to see repeated.

Government-backed investment funds designed to skirt financing restrictions have also incurred their own trove of so-called "hidden" debt. Some of these obligations appear on government balance sheets, though bonds issued by these vehicles in the latter half of 2016 appear to be off the books in some cases.

Even infrastructure development projects that Beijing refers to as public-private partnerships hold hazards. Many of the companies that take over and run public projects are themselves state enterprises backed by regional governments, and low yields on these projects can lead to piles of bad debt. The total scope of such partnership arrangements, including those in the planning stages, is thought to far exceed 10 trillion yuan.

The notion of sacrificing fiscal health to meet an imperative economic growth target is catching on in Japan and the U.S. as well. But China is different: despite the yuan's status as a key international currency, the country can hardly be said to have developed a flexible and open financial system. Beijing shows no hesitation about restricting the information it gives to the world. It is critical to be skeptical, and look for what might be hidden beneath the surface of official figures.

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