The policy targets announced at China's National People's Congress (NPC) are likely to result in a further build-up of economic imbalances, at least in the short term, but official statements and recent policy shifts signal greater awareness of medium-term financial risks, says Fitch Ratings.
The NPC, which concluded last week, appeared to confirm a partial shift in policy focus toward curbing leverage and away from supporting growth.
Macroprudential controls on banks' shadow-funding activities have already been tightened in recent months, and the People's Bank of China (PBOC) has increased key money-market interest rates. Official statements highlighted the importance of urban job creation and supply-side reforms to reduce overcapacity.
However, the quantitative targets set for 2017 show that near-term growth targets are still being prioritized, at the expense of medium-term financial risks.
The GDP growth target for 2017 was set at "about 6.5%", compared with the 6.5%-7.0% growth target for 2016 set at last year's NPC and an actual 2016 GDP growth outcome of 6.7%.
Leverage across the economy will continue to rise over the coming year, although we expect the pace of increase to slow.
The economy currently has strong momentum, with high-frequency data showing rapid growth in housing sales, a pick-up in fixed-asset investment, and only a modest deceleration in retail sales growth.
Fitch expects GDP growth to remain strong at 6.3% in 2017, but efforts to keep the economy growing at its current pace would build financial risks, and could eventually put pressure on the external accounts through a narrowing of the savings-investment gap and current account balance.
Immediate external pressures have abated. The PBOC governor talked down concerns over the decline in foreign-currency reserves in his comments at the NPC, saying that the drop was appropriate insofar as reserve accumulation during the previous decade was excessive.
Reserves are well below their mid-2014 peak, but Fitch believes the combination of a large reserve stock and the authorities' successful efforts to contain the pace of capital outflows through recent administrative measures are sufficient to maintain currency stability in the near term.