Beijing Predicting Slower Growth for the Year Ahead

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Stock markets and commodity prices, including base and precious metals, fell this week following a presentation given to China’s annual parliament session by President Wen Jiabao, in which he announced a GDP growth target of 7.5 percent for 2012.

According to a China Daily report, this is the first time the Chinese government has reduced its economic growth target after keeping it around 8 percent for seven consecutive years. But it is in line with previous announcements of a 7% target for the 2011-2015 12th Five Year Plan. By way of comparison, China’s economy expanded by 9.2 percent in 2011 from a year earlier after it grew 10.3 percent in 2010. In the fourth quarter last year, the country’s GDP growth decelerated to 8.9 percent year-on-year, the slowest pace in 10 quarters.

Clearly, Beijing not only expects the economy to slow further, but wants to set expectations of slower growth rather than spook the markets as GDP results continue to slide. Beijing’s fight against inflation continues as President Jiabao said the government’s aim was to hold this year’s consumer price growth at around 4 percent — the previous target after it rose 4.5 percent in January — down from a 37-month high of 6.5 percent in July last year.

As a bellwether of China’s economy, the steel industry is also predicting slower growth. In a Reuters article, Zhu Jimin, chairman of Shougang Group, one of China’s leading steel mills, is reported to have said China expected to see just 4 percent growth in crude steel output in 2012, after 8.9 percent growth in 2011. Zhu said he could see global iron ore prices falling this year, as China’s demand eased. Meanwhile, automotive sales fell 24 percent year-on-year in January, the worst drop in more than seven years as consumers pulled in their horns.

As the Washington Post advised, China’s slower growth is in large part due to a weaker global economy, particularly for China’s export markets, but it is also a recognition that China needs an emphasis on better growth — not faster growth. The country faces a raft of environmental, social and economic development challenges that will not be solved by a continued headlong rush for growth. In a follow-up article, we will be exploring the challenges China faces in liberalizing its economy over the coming decade, what needs to be done and what it may mean for metals markets.

Meanwhile, China’s acknowledgment that The New Normal will not allow continued double-digit growth (even if that were desirable) may weaken a little of the bull narrative for metals that has been such a feature of the last decade.

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