China's lower growth target dents stimulus hopes

China's policy makers have signaled acceptance of lower growth, allowing more space for reform and moderating expectations of an aggressive stimulus.

In his annual work report to the National People's Congress, Premier Li Keqiang set the growth target at about 7 percent, down from 7.5 percent in 2014.

That's bowing to the inevitable. A shrinking working age population, overcapacity in industry, and a stressed financial system mean China's potential to grow is not what it used to be.

It also shapes expectations for policy in the year ahead. Acceptance of lower growth reduces the need for a stimulus, moderating expectations on the scale of rate cuts and public spending to come.

Other data emerging in the first news flashes shows the government forecasting 12 percent growth in M2 for 2015, down from 13 percent in 2014. The target for the budget deficit was expanded to 2.3 percent of GDP from 2.1 percent of GDP.

A more expansive fiscal policy and conservative monetary policy extends a trend already in place. In February, the State Council promised to increase the effectiveness of fiscal policy in supporting growth.

It also reflects the reality that banks are already overstretched, though public debt is relatively low. Monetary policy has to be more restrictive, while fiscal policy still has space to support demand.

We believe a lower growth target is already well expected, so the market impact should be limited. That said, expectations of more moderate stimulus could be a negative for over-extended equity markets.

The author is Bloomberg Chief Asia Economist. The views do not necessarily reflect those of China Daily.