The Wall Street Journal

Jan. 28, 2015

Annual economic growth of 7.0% is a “reasonable target” for China this year, a former adviser to the central bank said, adding that he expects the nation’s daily foreign-exchange band to be widened when conditions are right.

Li Daokui, professor at Tsinghua University and a former adviser to the People’s Bank of China, said he believes growth in the world’s second-largest economy is now nearing its low point, adding that he expects growth rates to pick up within a year or two.

“I believe we’re now at the bottom of a u-shape,” Mr. Li said at a Ministry of Foreign Affairs briefing for journalists. He said his forecast was for 7.2% year-over-year annual growth in 2015, rising to 7.5% by 2017 or 2018.

Last year, China’s year-over-year annual growth was 7.4%—its slowest pace in nearly a quarter century—as the economy weathered a real-estate slump, rising debt and slower demand for its products at home and abroad. Most economists expect Beijing to set an annual-growth target for 2015 of 7.0% during its annual legislative session in March, when the government lays out policies for the year.

"This is a $10trillion economy. It’s a huge elephant. No one can shake it up."
—Li Daokui

Mr. Li also said he expects China’s daily currency-trading band to be loosened, but he didn’t provide a time frame. The People’s Bank of China sets a daily rate for the yuan, also known as the renminbi, against the U.S. dollar. Since March last year, China has allowed investors to push the yuan’s value 2% in either direction from the so-called parity rate in daily trading. Mr. Li said he expects that 2% trading band to be further widened to enhance flexibility.

Yuan depreciation is normal, he said, and not a cause for concern. “Some speculators sell short, but this shows that the floating band of the RMB, that it floats two ways,” he said. “Depreciation of the RMB is not a trend because the fundamentals of the Chinese economy are sound.” He added: “This is a $10 trillion economy. It’s a huge elephant. No one can shake it up.” Mr. Li said China could see slower growth for a couple of years as it goes through a period of “dynamic adjustment,” before the economy resumes an upward trajectory. The major cause of recent slowing growth is declining investment in the housing market, he said.

However, Mr. Li expects this will be partly offset this year by increased government spending on infrastructure, which he characterized as a “second engine of growth,” and that real-estate prices will stabilize before the middle of 2016. China needs to reform its local-government debt to secure new sources of economic growth, Mr. Li said. While some local governments are likely to face problems meeting their debt obligations in the future, the problems aren’t systemic, he said. “Of course, restructuring of some local governments is possible, but it won’t be a crisis nationwide,” Mr. Li said.