China sets 2017 growth target of 6.5%, little appetite for reforms

China's premier sounded an upbeat note on the country's growth prospects over the weekend, ahead of a twice-a-decade leadership change at the end of the year, but some economists were less than convinced.

On Sunday, Li Keqiang said China's economy would grow "by around 6.5%, or higher if possible," which was roughly in-line with economists' forecasts although some had seen the potential for a slightly lower goal.

In 2016, Beijing set a target for gross domestic product growth of between 6.5% and 7.0%.

Systemic risk was under control and economic fundamentals were sound, he said in his work report presented to the annual National People’s Congress.

Nonetheless, Keqiang warned of both external and domestic risks on the horizon, such as a quicker pace of monetary policy tightening by the US central bank and trade protectionism from the new US administration.

Julian Evans-Pritchard at Capital Economics also saw some risks, namely the lack of action on key reforms, telling clients: "Official statements at the National People’s Congress suggest policymakers feel less urgency to support growth than a year ago and are instead attempting to address credit risks by tightening monetary and fiscal policy. There is little sign, however, that policymakers are adopting the kind of ambitious reform agenda needed to put China’s growth on a more sustainable long-run path."

Internally, authorities needed to be mindful of risks stemming from the country's shadow banking system and internet finance, Kequiang added.

Excess industrial capacity, housing capacity in smaller cities and environmental damage were other factors to watch.

The Chinese leader also cited mounting downward pressures on growth and serious challenges from excess industrial capacity, including in steel and coal production, an overhang of housing inventory in small cities, and environmental degradation.

China's economy had reached a critical phase in its transition away from investment-led growth, he said.

On a regional basis, there were also increasing divergences in growth and the fiscal imbalance had increased.

Keqiang also said monetary policy would be "prudent and neutral".

On a related note, the growth target for M2 money supply was lowered from 13% to 12%, that for retail sales from 11% to 10% and that for fixed asset investment from about 10.5% to 9%.

According to Jim Reid at Deutsche Bank, the new money supply target did not suggest "meaningful tightening [in monetary policy]".

Evans-Pritchard on the other hand believed the People's Bank of China would continue hiking interbank rates in the coming quarters.

Consumer prices on the other hand were still seen advancing by 3% and the public spending deficit to gross domestic product ratio at 3%, alongside continued liberalisation of China's exchange rate regime.

Evans-Pritchard was critical on this score too, explaining how China's spending deficit had in fact been closer to 4% of GDP in 2016.

Tighter fiscal and monetary policies, combined with a lack of reforms, meant fixed asset investment was likely to fall short of Beijing's target again.

"Our economists also highlighted that another surprising part of the work plan is that discussions on the property market were still brought up in the context of "cut excess urban real estate inventory" which doesn’t seem to suggest much further policy tightening for the property market," Reid said.