BOFIT Viikkokatsaus / BOFIT Weekly Review 2016/10
While premier Li’s assessment hit familiar themes such as financial market reform, overhaul of state-owned enterprises and reducing overcapacity, it offered little in the way of concrete actions. Li said that China this year intends to improve the yuan exchange-rate mechanism and keep the yuan’s exchange rate “basically stable.” Increased innovation activity was proposed as a general cure for the economic slowdown. The 2016–2020 plan calls for an increase in R&D spending to 2.5 % of GDP, while energy efficiency will be improved and emissions reduced.
Achieving the growth target requires monetary and fiscal stimulus measures. Budget spending is planned to rise 7 % this year, which will boost the budget deficit. There is room to manoeuvre in monetary policy, as this year’s inflation target has been set at 3 %, while the broad money supply (M2) and broad credit measure (total social financing) each have growth targets of 13 %. Indebtedness is likely to rise swiftly if these targets are met; the expansion of credit is roughly double the rate of nominal GDP growth.