The Discussion Of Economic Growth Goals Has Become Heated Again.

At the just concluded central economic work conference, the top leaders judged that the root cause of the outstanding contradictions and problems in China's economic operation was a major structural imbalance. Since it is a structural problem, it needs to be solved with structural policies. It can not be expected that these structural problems will automatically disappear as a result of the slowdown in economic growth. On the contrary, the decline or even instability of economic growth will greatly increase the difficulty of solving these structural problems. Adjusting the structure and preventing risks by reducing the growth target is the wrong prescription.

Approaching the new year, the discussion on how to set the target for next year's economic growth has become enthusiastic again. The focus is on whether the GDP growth target should be lowered to below 6.5%. Although the domestic economic situation has improved in recent months, the GDP growth in 2016 has been stable above 6.5%, and there is no suspense. But the endogenous driving force of economic growth is still not strong. The current economic recovery is mainly driven by real estate investment. However, after the real estate regulation and control has strengthened, real estate investment has shown signs of weakness, and the future trend is not optimistic. Another important investment engine, infrastructure investment, has slowed down in recent months due to tighter financing bottlenecks. It is hard to make up for the empty space left by real estate in the future.

At present, the rapid growth of price level (especially PPI) is not due to economic improvement, but to a large extent, it is a result of capacity policy restraining supply. While the upstream price is rising rapidly, the profits of the middle reaches and the lower reaches have been seriously eroded, indicating that this price increase is not sustainable. From these factors, the downward pressure of economic growth in 2017 is still very large, and still needs stable growth policy bottom. Accordingly, it is very important to set the GDP growth target that determines the direction of policy.

Despite the sustained slowdown in China's economic growth over the past few years, the government has also lowered its growth targets several times. But whether the GDP growth target will be lowered to below 6.5% in 2017 is still crucial. On the one hand, the growth rate of GDP has dropped to a very low level, which is only one step away from achieving the goal of building a moderately prosperous society in 2020. Whether the target of annual GDP growth will be lowered again will affect the confidence of all walks of life in achieving the long-term goal of a well-off society. On the other hand, in 2016, the government has repeatedly said that China's economy has entered the so-called "L bottom". Whether the growth target is lowered at this time means whether the argument of "L bottom" can win the trust of the people.

In the next few years, including 2017, 6.5% Growth bottom line We must stick to it. If the GDP growth target is below 6.5%, it is likely to crack down on the confidence of all parties in China's economy and hurt the reputation of the policy and cause great risks.

6.5% the bottom line is a reassurance.

6.5% the bottom line of GDP growth is important because it is a "reassurance" and is the key to stabilizing confidence and guiding expectations. Without this reassurance, all sides' confidence in China's economy will be greatly hit. Confidence is very important. When confidence is still in existence, it may not be easy to detect its existence. But once confidence is lost, it will bring great impact, such as mountain collapse and tsunami. Even if it can be rebuilt later, it will have to pay a heavy price.

The trend of the RMB exchange rate clearly shows this. More than a year RMB Devaluation pressure The reason for this is that we have lost confidence in the renminbi. Before the confidence was still there, there was no obvious pressure on the renminbi to depreciate. During the period from July 2014 to March 2015, the US dollar strengthened significantly, and the US dollar index which represented the US dollar exchange rate rose by about 25% during this period. Over the same period, the depreciation rate of RMB against the US dollar will not exceed 1%. During this period, the stability of the exchange rate between the RMB and the US dollar was generally taken for granted, and the possibility of a significant depreciation of the renminbi was rarely considered.

But in August 11, 2015, when China unexpectedly let the renminbi depreciate, the market lost confidence in the stability of the RMB exchange rate, and the pressure of depreciation came with it. Since August 2015, the US dollar index has risen by only 6%, while the renminbi has depreciated more than 10% against the US dollar. After the "811 exchange reform", in order to stabilize the RMB exchange rate, China has accumulated about 600 billion US dollars in foreign exchange reserves, and has greatly strengthened the control of cross-border capital flows. But the depreciation pressure is still lingering. It is hard to return to the stable state of exchange rate before "811". This is evident from the loss of confidence.

Exchange rate is only one aspect of macroeconomic, and its impact is relatively limited. But confidence in China's economy is the foundation of economic stability. From the demand side, once investors lose confidence in the economic outlook, they will not expect future investment returns, and investment will inevitably decline sharply. In recent years, the obvious deceleration of private investment in China is directly related to the decrease of investor confidence. In addition, once the confidence of the economy is lost, residents' income expectation and willingness to spend will be frustrated, and consumption will not be stable. From the supply side, the lack of stability expectations for the future, enterprises will continue to operate their own will have doubts, industrial upgrading, technological progress is naturally impossible. Therefore, to maintain stability in economic operation, we must first stabilize our confidence.

Although China's economic growth has continued to decline over the past few years, the annual GDP growth target has been lowered several times, but for two reasons, if the 2017 target is lowered to 6.5%, it will inevitably bring serious bruise to economic confidence and bring huge risks to economic instability.

First, abandoning the 6.5% bottom line will be interpreted by the market as the goal of giving up a moderately prosperous society, which will inevitably lead to a sustained decline in growth expectations. In the past, although the economic growth rate continued to slow down, but because of the goal of building a well-off society in an all-round way (its important criterion is GDP doubled in 2020 than 2010), we still have a bottom in mind. In order to achieve the goal of a well-off society, China needs close to 6.5% of the average GDP growth rate in the next few years (if GDP growth reaches 6.7% in 2016, the average growth rate of 2017-2020 will reach 6.43%). From this perspective, the insistence on the 6.5% bottom line is the insistence on the goal of a well-off society. Of course, some people may say that it will not matter if the growth rate falls below 6.5% in the short term, as long as the speed up in the next few years can still achieve the goal of a well-off society. But this is hard to believe. In fact, abandoning the bottom line of 6.5%, there is no bottom line for confidence in China's economy. Pessimism is expected to heat up. The decline of investment caused by pessimistic expectations and capital flight will eventually make pessimism self actualization.

Second, abandoning the 6.5% bottom line will bring a significant blow to China's policy reputation and reduce the effectiveness of policy regulation in the future. In 2016, the government has repeatedly shouted that China's economy has entered the "L bottom". The authoritative person even explicitly said: "China's economic operation can not be U type, not even V type, but L trend." In the first 3 quarters of 2016, the growth rate of GDP continued to stabilize at 6.7%, and it also enhanced the confidence of all parties in the judgment of "L bottom". At this point, if the growth target is lowered to 6.5%, it will make people worry that our country is still in the "vertical painting" of L, or it will make people doubt the decision makers' duplicity. In either case, it is bound to hurt policy reputation. After the "L" is expected to fail, I am afraid you will have to believe in "I".

Therefore, whether in the short term or in the long run, the 6.5% growth target is an essential reassurance. Without this reassurance, it is hard to maintain confidence in China's economy, which is likely to trigger "abnormal fluctuations" in the macro-economy.

　　 Abandon the 6.5% bottom line and guard against it. risk

There is a popular view that abandoning the growth target of 6.5% can prevent risks. Because the steady growth will decline, there will be more room to promote deleveraging, curb asset bubbles and prevent and control financial risks. The starting point of this view may be good, and the debt, bubble and financial risk it is worried about does exist. But to reduce growth targets to prevent risks will only lead to a greater risk.

We must not forget that the biggest risk of China's economy is economic instability. If economic growth is not stable, prices will go down, leading to debt deflation, but increasing debt risk. In the context of economic growth instability, the quality of assets of financial institutions will also deteriorate sharply, triggering a financial crisis. In this case, all kinds of asset bubbles will burst, but they will never be carried out in a kind of gentle way that all parties want. Therefore, when we are trying to prevent and control risks, we should not just put our eyes on the risks that have emerged, but ignore the bigger risks that are hidden beneath the surface. In order to reduce the risk of growth, it will lead to macroeconomic instability, which is to pick up sesame and lose the watermelon. Finally, watermelon and sesame seeds are not available.

Even without considering the impact of economic instability, lowering the target of GDP growth will not reduce debt, control bubbles and financial risks, but will only backfire. The International Monetary Fund (IMF) predicts that the proportion of China's savings accounts for GDP will remain at close to 40% by 2020, two times the average of other countries in the world. China's financial structure based on creditor's rights financing will also continue for a long time (currently, debt financing accounts for more than 90% of total social financing). Considering that the huge domestic savings in China can be transformed into domestic investment through the financial system, the rise of domestic total debt is reasonable.

Under such circumstances, if we try to lower the level of the whole social debt, we must compress the growth of the total amount of social financing, which will lead to the recurrence of the financing difficulties of the real economy. On the other hand, the debt of the real economy is an asset of the financial system (the loan that the enterprise obtains is the assets of the bank). Compressing the whole social debt also means that the number of assets that the financial system can find in the real economy will decrease, and the shortage of assets will come back. In the 2014 and 2015 years, the situation of the difficulty in financing the real economy and the flooding of the financial market appeared in our country, which led to the big bubble in the financial asset prices in the background of the slow growth of the real economy. The core reason is that the policy of restraining all social debts, especially local governments and real estate developers, has restrained the growth of total social financing and blocked the transmission channel of funds from finance to entities. Because of this, the government will focus on solving the problem of financing this year, and at the just concluded central economic work conference, "smooth monetary policy transmission channels and mechanisms".

Therefore, by lowering the target of GDP growth and letting the decline of economic growth to control debt, it will re block the flow of money from finance to entities, so that liquidity will once again backlog in the financial market and blow up asset price bubbles again. In the bubble expansion process, financial leverage and other risks will emerge again, just like 2014-15 years.

If we really want to lower the debt level of the whole society, we need to reduce the source of debt, that is, savings. In other words, a truly effective way to reduce leverage is to increase consumption and reduce savings. And consumption is made by consumers. To increase consumption, we need to adjust the income distribution to the consumer sector. Before such a structural adjustment is realized, forcibly reducing the economic growth and reducing the financing of the real economy will only increase the risk of entity and finance at the same time.

Therefore, whether from the perspective of steady growth or risk prevention, our country needs to stick to the bottom line of 6.5% growth. To maintain the growth rate of 6.5%, we must pay a lot of effort, but this is not the reason for the unstable growth. It's like being tired of swimming in a river, but surely it can't stop because of exhaustion. Maintaining the growth rate of 6.5% will also bring some side effects, but we can not deny the steady growth policy on the basis of these side effects. We must also see the enormous positive benefits brought about by the stability of economic growth.

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