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Economy

China likely taking 6.5% as new growth target

HONG KONG -- China's goal of "medium-high" growth for the next five years has met with widespread skepticism from economists and pundits in view of the structural weaknesses plaguing the Chinese economy.

     The fifth plenary session of the 18th Communist Party of China Central Committee, which wrapped up on Thursday, adopted a draft five-year plan to take effect from 2016. Under the plan, to government is expected to target growth in the upper-6% level.

     The committee also decided during the session to end the one-child policy adopted more than 30 years ago, but economists say this will have no immediate effect on the nation's economy.

Assumed the target

In a recent speech at the Central Party School of the CPC, Chinese Premier Li Keqiang said it will be difficult to achieve a society in which most people are moderately well off unless the economy grows at an average rate of 6.53% over the next five years, according to information disseminated on the Internet on Thursday after the end of the committee's plenary session.

     While the information was immediately deleted, many view Li's remarks as an indication of the lower limit of growth for the coming five years.

     The communique of the plenary session, released through the state-run Xinhua News Agency, includes a target of doubling China's gross domestic product and per capita income of citizens from 2010 levels by 2020.

     To double GDP, China's economy needs to grow at an average rate of 6.5% in 2016-2020, Nomura International (Hong Kong) said. This is in line with the figure reportedly referred to by Li.

     The communique itself did not mention a numerical growth target, which would be adopted at the National People's Congress next March, but 6.5% is already being taken as the de facto target.

     The new five-year plan is designed as a transition from the current plan, which targets growth of 7%. But even 6.5% is an ambitious goal, as China is under intense pressure to deal with structural issues, such as overcapacity resulting from stimulus measures introduced after the 2008 global financial crisis, UBS said.  It is a view shared by many China observers.

     The communique mentioned several other policies, including promoting technological innovation; shifting to a more sophisticated, consumption-led economy; reforming financial markets and pursuing the "One Belt, One Road" trade initiative to link China to Europe. Detailed measures for achieving these goals have yet to be unveiled, however.

     The communique referred to reforming powerful state-owned enterprises only briefly, saying China will improve their management. This delicate touch indicates strong resistance from vested interests.

     Andrew Colquhoun, head of Asia-Pacific Sovereign Ratings at Fitch Ratings, said administrative reforms "within the existing ownership model are more likely than widespread privatization."

     It is unclear whether such an approach will be enough to greatly improve the management of state companies, whose inefficiency is acting as a drag on the economy as a whole, he said.

Population problems

The decision to end the one-child policy is aimed at addressing the negative demographic effects it has had. The shrinking working-age population, for example, has caused labor shortages and a noticeable increase in wages in China's coastal region.

     Under the new policy, all couples will be able to have two children. Local media are forecasting that this will increase the number of births by 3 million to 8 million a year. But, as Japan, South Korea and other East Asian countries have also experienced, birth rates in urban areas of China are falling as income levels rise.

     China amended the one-child policy in 2014, allowing couples to have two children if one parent is an only child. The change resulted in an increase of 470,000 in the number of births, much smaller than the initial forecast of 2 million.

     Moreover, it will take at least 15 to 20 years before the end of the one-child policy starts contributing to an increase in the labor force.

     According to a United Nations estimate, the working-age population in China, those between 15 and 64 years old, will drop to 65% of its total population in 2035, down from 73% in 2015. The ratio of citizens aged 65 and older will jump to 21% from 9% during the same period.

     Because drastic demographic shifts are difficult to engineer, the end of the one-child policy may have come too late, though it is better than nothing, Goldman Sachs said.

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