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Daily Insight

8 March 2016

China targets 6.5-7% growth in 2016

China introduces 6.5-7% target range for economic growth in 2016

Last weekend, at the start of the annual National People’s Congress, China’s Prime Minister

Li Keqiang presented the proposals for the government’s work plan for 2016 to congress. As

some ingredients from the plan had already been discussed publicly, these proposals did

not contain many surprises. For the first time, the Chinese government presented a target

band for economic growth instead of a “single-point” target. After having just missed the

2014 (7.3% versus 7.5%) and 2015 (6.9% versus 7%) targets, the government now sets a

range of 6.5-7%.

This shift echoed statements from the National Development and Reform Commission

earlier this year and was in line with market expectations, including ours. Our growth target

for 2016 of 6.5% is at the bottom of this range and in line with consensus. We expect

China’s economic slowdown to remain gradual, assuming the authorities will add further

stimulus. However, China’s soft landing will remain bumpy, given that China faces several

key macro-financial risks that complicate the desirable transition of the country’s growth

model.

Authorities aim to continue with prudent fiscal and monetary stimulus

Looking at some of the other targets proposed by PM Li, it seems that the government

indeed aims to continue with prudent fiscal and monetary policy stimulus to keep the

economic slowdown gradual in nature. As we have indicated earlier (see our February

China Watch, Balancing act goes on in Year of the Monkey), the authorities are putting more

focus on fiscal stimulus, for instance by reducing taxes for corporates. The fiscal deficit

target will be raised to 3% of GDP, from 2.3% of GDP last year. This is in line with our

budget deficit forecast, although some analysts had expected more. We should bear in

mind, though, that a significant part of fiscal stimulus in China takes place off-budget (IMF

estimates for the fiscal balance including off-budget activity is around 10% of GDP).

Meanwhile, the inflation target is unchanged at 3%, while the target for M2 growth is set

around 13%, slightly up from the 2015 target of 12%. A new target was introduced for

Group Economics Macro & Financial Markets Research

Arjen van Dijkhuizen

Senior Economist

Tel: +31 20 628 8052

arjen.van.dijkhuizen@nl.abnamro.com

Aline Schuiling

Senior Economist

Tel: +31 20 343 5606

aline.schuiling@nl.abnamro.com

As expected, China introduces target range of 6.5-7% for economic growth

Beijing aims to continue with prudent fiscal and monetary stimulus

Pace of decline of China’s FX reserves eased sharply in February

Germany’s factory orders start the year on a weak note

2 Daily Insight – China targets 6.5-7% growth in 2016- 8 March 2016

aggregate financing (around 13%), while the traditional targets for export and import growth

were dropped. All this suggests that there is still some targeted monetary easing on the

cards, although we expect the PBoC to be more careful with regard to the timing of

monetary easing measures given uncertainties related to the exchange rate and capital

outflows. The authorities have also indicated that they will put more effort into supply side

measures in the coming years to support longer-term growth prospects, focusing on

reducing overcapacity (and jobs) in sectors such as heavy industry and real estate and

proceeding with SOE reform. All in all, the authorities will have to continue their careful

balancing act, finding a proper balance between stabilising economic growth and

safeguarding financial stability.

Decline in China’s FX reserves eases in February

USD trn. USD bn.

Source: Thomson Reuters Datastream

Pace of decline China’s FX reserves dropped sharply in February

Meanwhile, the slide in China’s FX reserves eased significantly in February. FX reserves fell

by USD 28.6bn to USD 3.2trn, whereas markets had expected a decline of USD 41bn. In

fact, this drop was significantly lower than the average decline of USD 98bn in November

2015-January 2016. This is indicative of an easing of capital outflows, following recent

statements by the PBoC governor pointing to exchange rate stability and other measures

taken to stabilise the CNY versus the US dollar (e.g. FX intervention, stronger USDCNY

fixing) and to curb capital outflows. It should also be taken into account that part of these

capital outflows relate to Chinese entities starting to hedge USD exposure and/or repaying

FX loans and to the unwinding of carry trades; these kind of outflows are not really

‘disruptive’ but are in fact reducing FX risks for China Inc.

Germany’s factory orders decline in January

Orders received by Germany’s industrial sector fell by 0.1% mom in January, following a

0.2% decline in December (revised upward from -0.7%). Since the monthly changes in

orders tend to be very volatile we assessed the detailed data by looking at the total change

in December 2015 and January 2016. Domestic orders fell by 3.1% in this two-month

period, whereas foreign orders increased by 1.8%. Within the foreign orders, the orders from

other eurozone countries rose modestly (+0.4%). Meanwhile orders from countries outside

the eurozone jumped by almost 3%. Although the data are too volatile to draw very strong

conclusions, they seem to be in line with our view that the German economy and the

eurozone as a whole lost some momentum in the first quarter of this year.

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Monthly change (rhs) FX reserves, stock (lhs)

3 Daily Insight – China targets 6.5-7% growth in 2016- 8 March 2016

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Day Date Time Country Key Economic Indicators and Events Period Latest outcome Consensus ABN AMRO

Monday 07/03/2016 08:00:00 DE Manufacturing orders - % mom Jan -0.1 -0.2 0.0Monday 07/03/2016 09:00:00 CH Foreign currency reserves - CHF mln Feb 571.1bMonday 07/03/2016 21:00:00 US Fed Reserve consumer credit - USD bn Jan 10.5 15.3

Tuesday 08/03/2016 00:50:00 JP GDP - % qoq 4Q F -0.3 -0.4Tuesday 08/03/2016 08:00:00 DE Industrial production - % mom Jan -1.2 1.4Tuesday 08/03/2016 11:00:00 EC GDP - % qoq 4Q P 0.3 0.3 0.3Tuesday 08/03/2016 12:00:00 US NFIB small business optimismem - index Feb 93.9 94.2 94.0Tuesday 08/03/2016 CN Exports - % yoy Feb -11.2 -14.5Tuesday 08/03/2016 CN Imports - % yoy Feb -18.8 -10.1

Wednesday 09/03/2016 16:00:00 CA Policy rate - % Mar 9 0.5 0.5 0.5Wednesday 09/03/2016 NZ Policy rate - % Mar 10 2.5 2.5 2.5

Thursday 10/03/2016 02:30:00 CN CPI - % yoy Feb 1.8 1.9Thursday 10/03/2016 02:30:00 CN PPI - % yoy Feb -5.3 -4.9Thursday 10/03/2016 06:30:00 NL CPI - % yoy Feb 0.6 0.6Thursday 10/03/2016 13:45:00 EC ECB Deposit rate - % Mar 10 -0.3 -0.4 -0.5Thursday 10/03/2016 13:45:00 EC ECB Refi Rate - % Mar 10 0.05 0.05 0.05Thursday 10/03/2017 14:30:00 EC ECB Press ConferenceThursday 10/03/2016 14:30:00 US Initial jobless claims 278.0 275.0Thursday 10/03/2016 15/03/2016 CN M2 money growth - % yoy Feb 14.0 13.7Thursday 10/03/2016 15/03/2016 CN New loans - CNY bn Feb 2510 1200Thursday 10/03/2016 15/03/2016 CN Aggregate financing - CNY bn Feb 3417 1780Thursday 10/03/2016 KR Policy rate - % Mar 10 1.5 1.5 1.5

Friday 11/03/2016 08:00:00 DE CPI - % yoy Feb F 0.0Friday 11/03/2016 10:30:00 GB Trade balance - GDP mln Jan -2709Friday 11/03/2016 PL Reference rate - % Mar 11 1.5 1.5

Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected key variables and events)