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Economic Commentary
QNB Economics
economics@qnb.com
15 March 2015
Will China Meet its 2015 Growth Target?
In his presentation to the National People’s
Congress on 5 March, Chinese Premier Li
Keqiang outlined the government’s plans and
targets for the Chinese economy. Specifically,
the government has lowered its target for
economic growth this year to around 7.0%. We
expect growth in 2015 to be broadly in line
with the government’s target, but slightly
lower than 7.0% due to domestic and foreign
headwinds.
China’s growth was 0.1% below the official
7.5% target in 2014, the first sub-target
outturn since 1998. This was mainly the result
of slower investment growth, a weakening of
global demand for Chinese exports and lower
growth in private consumption. At the same
time, inflation came in below target at 2.0% on
lower commodity prices and slowing rent
inflation, notwithstanding the numerous fiscal
and monetary stimuli provided by the
authorities throughout 2014. Particularly
worrisome is the decline in Chinese house
prices in 2014 that has negatively impacted
asset quality in the banking system,
particularly in the shadow banking sector.
Real GDP Growth and Targets
(%)
Sources: National Bureau of Statistics
The lower targets for 2015 indicate that the
government expects China’s economic
slowdown to continue. The slowdown is
expected to be broad-based as the government
also revised down targets for investment
growth, retail sales and foreign trade.
Furthermore, there are a number of headwinds
facing the Chinese economy that could present
downside risks to growth.
First, global demand is expected to remain
subdued in 2015 resulting in a continued
slowdown in investment growth.
Second, the government has sought to boost
private consumption to replace investment as
the main driver of growth. However,
consumption growth is lagging (retail sales
only grew by 12.0% in 2014, less than the
government target of 14.5%) and the share of
private consumption in the economy (around
36% of GDP) is expected to remain well below
advanced economy levels.
Third, deflationary risks are rising, which
could represent a drag on growth as
consumption and investment are delayed to
take advantage of lower expected future
prices. Inflation averaged 1.1% in the first two
months of 2015 and is likely to remain low as
further house price declines push down rent
inflation and as low global commodity prices
depress foreign inflation. The risks posed by
deflation are particularly acute for China
because of high debt levels (over 200% of GDP
including the traditional and shadow banking
systems) as deflation increases the real value
of future debt payments.
Fourth, China faces a nexus of connected risks
in real estate, local government debt and
shadow banking. Average house prices in 70
Chinese cities fell 5.1% in the year to January
7.0
6.9
6
7
8
9
10
11
12
13
14
15
'97 '99 '01 '03 '05 '07 '09 '11 '13 '15f
Target GDP Actual GDP

2. Page 2 of 2
Economic Commentary
QNB Economics
economics@qnb.com
15 March 2015
2015 owing to excess housing supply. Local
governments have borrowed heavily in the
past, including through the shadow banking
system, to finance large real estate
developments and other infrastructure
projects. This has led to growing concerns
about the build-up of excessive credit in the
shadow banking system and the potential
fallout. Further declines in real estate prices
could trigger defaults across the official and
shadow banking system.
In response, the government plans a number of
measures to combat these headwinds and keep
growth in line with its target. First, a fiscal
stimulus is expected in 2015—higher spending
will lead to an increase in the fiscal deficit
target to 2.3% of GDP in 2015, compared with
an actual deficit of 1.8% in 2014.
Second, low inflation provides room for the
authorities to loosen monetary policy further.
The central bank has lowered its inflation
target from 3.5% to 3.0%, but this remains well
above current inflation. The central bank
already cut lending and deposit rates at the
end of February by 25 basis points and also cut
the reserve requirement ratio (RRR) for banks
by 50 basis points to 19.5% at the beginning of
February. Further interest rate and RRR cuts
are expected during 2015 to help bring
inflation in line with target and boost the
economy.
Third, the government is introducing
regulations to increase transparency and bring
shadow banking out of the shadows. Reforms
have helped slow credit growth in shadow
banking from 35.5% in 2013 to 14.7% in 2014.
A relaxation of the cap on bank deposit rates
has attracted funds away from shadow
banking. Additionally, local government debt
management is being strengthened and bond
market development encouraged to bring
shadow banking debt into the regulated sector.
New borrowing guidelines issued in 2013-14
made local officials accountable for borrowing
decisions and prohibited further borrowing
through local government financing vehicles,
which had been heavily used to raise debt in
the shadow banking system.
In summary, China’s new growth targets
illustrate that the authorities have
acknowledged the inevitability of the growth
slowdown. The authorities are expected to
implement a sufficient fiscal and monetary
stimuli to achieve the growth target and are
taking regulatory action to mitigate against
economic risks. They have substantial
resources to support the economy at its
disposal, including USD3.8tn in international
reserves. Therefore, we expect growth to be
broadly in line with the target,
notwithstanding strong headwinds blowing
against Chinese growth.
Contacts
Joannes Mongardini
Head of Economics
+974- 4453-4412
Rory Fyfe
Senior Economist
+974-4453-4643
Ehsan Khoman
Economist
+974-4453-4423
Hamda Al-Thani
Economist
+974-4453-4646
Ziad Daoud
Economist
+974-4453-4642
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