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China’s Central Bank Estimates Potential Growth of Under 6%

BEIJING (Bloomberg):- China’s central bank estimated the maximum the economy can expand without fueling inflation, known as the potential growth rate, is under 6% in the next five years.

In a working paper released Thursday, the statistics department of the People’s Bank of China said potential growth was projected at 5%-5.7% 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 gross domestic product 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, according to the paper.

China’s official growth target for 2021 is “above 6%,” though economists predict much higher expansion of more than 8%, partly because of last year’s low base during the pandemic.

The PBOC’s paper points out that traditional large-scale fiscal and monetary stimulus policy won’t 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 build-up 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 Thursday after the meeting omitted previous phrasing used by the PBOC of “no sharp turn” in policy, suggesting policy makers are giving themselves more room to act if needed.

Chen Xi, a fixed income analyst at Pacific Securities, 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.”