China’s central bank on Thursday estimated the maximum the economy can expand without fueling inflation, known as the potential growth rate, is less than 6 percent in the next five years.
In a working paper, the statistics department of the People’s Bank of China (PBOC) said that potential growth was projected at 5 percent to 5.7 percent in the period covering the government’s latest five-year plan through 2025.
That represents an overall “medium to high” growth rate, it said.
Potential output measures the maximum sustainable expansion of GDP without causing inflation. The objective of monetary policy should be to match actual output with potential, and the support of monetary policy to the real economy should be in line with the expansion of potential GDP, the paper said.
China’s official growth target for this year is “above 6 percent,” although economists predict much higher expansion of more than 8 percent, partly because of last year’s low base during the COVID-19 pandemic.
The paper points out that traditional large-scale fiscal and monetary stimulus policy would not be able to lift real GDP growth above potential. Such stimulus would only lead to inflation and a rapid increase in the debt ratio, causing systemic risks to the economy, it said.
The central bank is seeking to dial back the stimulus it pumped into the economy last year, concerned by the buildup in debt and the risk of asset bubbles.
At its quarterly meeting this week, the PBOC’s monetary policy committee reiterated its stance on keeping policy flexible and appropriate.
However, a statement released after the meeting omitted previous phrasing used by the central bank of “no sharp turn” in policy, suggesting that policymakers are giving themselves more room to act if needed.
Chen Xi, a fixed income analyst at Pacific Securities Co (太平洋證券), wrote in a note that the shift in language could mean the PBOC is taking a more flexible approach to policy fine-tuning based on current economic conditions.
The central bank had a more upbeat view of the economy, saying in its statement that “growth drivers continued strengthening, and positive factors have increased markedly.”
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