Risk Off Woes Worsened as China Drops GDP Target
As Ken has discussed in an earlier blog post this morning, markets are in risk off mode today, with USD and JPY bid, and risk FX such as AUD, CAD and NZD under pressure.
Contributing to today’s dour risk appetite was the overnight news that China will be completely dropping any GDP growth target in 2020.
Industrial metals, most notably copper, were under significant pressure last night. Partly, this was in line with the general risk off market feel, but commodities traders also pointed to the latest news on China dropping its growth target as a signal to expect lower demand this year.
The omission from Premier Li Keqiang’s work report marks the first time China has not set a target for gross domestic product (GDP) since the government began publishing such goals in 1990.
In recent weeks, reports had suggested that the target could be reduced to 3%, or even to 1%, so this news came as a surprise to many commentators.
Does the fact that China has completely abandoned its growth target suggest that things are much worse than we previously feared?
Perhaps the Chinese are doubtful of even managing to get back to positive growth this year at all, and don’t want to set a negative growth target.
We already know that the Chinese economy shrunk at a quarterly rate of 6.8% in Q1. Does today’s move suggest than expectations for Q2 growth should be lowered to a much more modest recovery than we previously thought?
Li Keqiang, the Chinese premier who delivered the work report on Friday, noted that the government refrained from setting a GDP target not because of domestic conditions but because foreign markets were so uncertain.
Domestic consumption, investment and exports are falling, and the pressure on employment is rising significantly, while financial risks are mounting, he warned.
Instead, China is to focus more on its job creation goals; it has this year set a target to create over 9 million urban jobs, according to Li’s report, down from a goal of at least 11 million in 2019 and the lowest since 2013.
To achieve this, ahead of the National People’s Congress, the week-long meeting of the largely rubber-stamp parliament, China’s top leaders have promised to boost stimulus to bolster the economy amid rising worries job losses could threaten social stability.
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