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China, wary of market risks, likely to keep GDP target in 2018 - policy sources

FILE PHOTO: A security guard walks on the bund in front of the financial district of Pudong in Shanghai, China July 27, 2017. REUTERS/Aly Song/File Photo

By Kevin Yao

BEIJING (Reuters) - China's leaders are likely to maintain this year's growth target of "around 6.5 percent" in 2018, even as they ratchet up efforts to prevent a destabilising build-up of debt in the world's second-largest economy, according to policy sources.

Policymakers will be under pressure to balance efforts to tackle debt with the need to keep growth on a steady path, they said. Investor concerns over a crackdown on debt was highlighted last week when a sell-off in bonds spread to the stock market.

Top policymakers are expected to gather in December for the annual Central Economic Work Conference, which investors watch closely for policy priorities for the year ahead, amid a crackdown on riskier banking and investment activities.

"Next year's growth target could be similar to this year's," said a source who is close to policy discussions within the government. "It's OK as long as we are able to secure growth of 6.5 percent."

President Xi Jinping said at the Communist Party Congress in October that China must defuse "major risks" in the economy, and fight poverty and pollution.

But he is also committed to meeting a goal set by the previous administration of doubling gross domestic product in the decade to 2020, to turn China into a "modestly prosperous" nation. That means that growth needs to be around 6.5 percent in each of the next three years.

The urgency to address debt and property risks was highlighted by a warning on the sidelines of the congress from the central bank chief, Zhou Xiaochuan, of the risk of a "Minsky moment" - a reference to a sudden collapse in asset prices after long periods of growth fuelled by debt.

"Growth cannot be too low as we still need to build a modestly prosperous society as outlined at the party congress," said a second source.

Both sources, who requested anonymity due to the sensitivity of the matter, are involved in internal policy discussions and offer advice to Chinese policymakers but are not part of the final decision-making process.

China's State Council Information Office, the government's public relations arm, has not yet responded to a request for comment sent by Reuters on Friday.

Having targeted financial sector debt this year, the government is likely to focus more on corporate debt next year to tackle bad loans that are weighing down state-sector businesses, the policy sources said.

The central bank has issued sweeping guidelines to tighten rules on the country's $15 trillion asset management sector and online micro-lenders, in the latest steps Beijing has taken to address systemic risks in the large shadow banking sector.

Fears of a crackdown on debt has rattled markets, with pressure on bond yields spilling over into the stock market last week, with shares experiencing their biggest selloff in months on Thursday.

"The market feels great pains once you tighten a bit, the bond market has been falling sharply. This may trigger systemic risks if we cannot handle well," said one of the sources.


China's economy grew 6.7 percent last year, a 26-year low, and was targeted to grow around 6.5 percent this year. But it has grown at an annual 6.9 percent in the first three quarters on strong demand for Chinese exports and sustained state spending.

That has the economy on track to pick up pace for the first time in seven years, and means 6.5 percent growth over the next few years would be enough to meet the 2020 growth target.

And despite the strong words from Xi and Zhou on debt, the leadership will have to balance reducing debt with meeting that target and keeping financial markets steady, the sources said.

Sheng Songcheng, a central bank adviser, said this month that the push for financial deleveraging had achieved results, and that he expected the effort to be less forceful next year.

That has been taken as a signal that the focus will be on reducing non-financial corporate debt, which at 165 percent of gross domestic product is the highest among major economies, according to data from the Bank of International Settlements.

At the same time, the sources said the central bank was expected to keep a slight tightening bias in policy settings.

Central bank data showed the weighted average lending rate for non-financial firms, a key indicator of corporate funding costs, edged up 9 basis points in the third quarter to 5.76 percent, following a rise of 14 basis points in the second quarter and a rise of 26 basis points in the first.

The average mortgage lending rate rose 32 basis points in the third quarter to 5.01 percent, after rising by a total of 17 basis points in the first half of the year.

"Deleveraging - no matter it's in the financial or corporate sector - will definitely put downward pressure on the economy," one of the policy sources said.

(Reporting by Kevin Yao; Editing by Philip McClellan)