China’s drive to cut pollution could reduce economic growth by 0.25 percentage point in the next six months while boosting factory inflation, according to Societe Generale SA.
Production cuts to curb emissions and tougher
nationwide environmental inspections will also support the profits of
large industrial companies as producer prices rise, said Yao Wei, chief
China economist at SocGen in Paris. She said the campaign will give a
"notable supply shock" to the economy.
"The Chinese government has turned very serious about fighting
pollution," Yao wrote in a note. It will be "more than a transitory
objective for the current leadership. Modestly slower growth will be a
necessary sacrifice for maintaining social stability over the medium
term."
Authorities have intensified their anti-pollution drive before a
twice-a-decade Communist Party Congress set to begin Oct. 18. The
expansion hasn’t yet shown signs of suffering for it, and economists
surveyed by Bloomberg project a second-straight year of 6.7 percent
growth.
Yao reiterated her view that leaders are likely to tolerate
growth rates below 6.5 percent in 2018 and beyond. That’s the country’s
longer-term growth target
for the five years through 2020 as well as the target for this year,
when policy makers have said they’re aiming for gross domestic product
growth "of around 6.5 percent, or higher if possible in practice."
Growth Targets
Annual growth should be no less than 6.5 percent in the next five
years to realize the goal of doubling 2010 GDP and per capita income by
2020, President Xi Jinping said in 2015.
The 13th five-year plan unveiled that year was the first to confront an
era of sub-7 percent expansion since Deng Xiaoping opened the nation to
the outside world in the late 1970s.
Now, if China manages to grow 6.8 percent this year, the pace of
expansion needed to achieve Xi’s goal is just 6.3 percent in the next
three years, Yao said. She wrote in a December report
that China is poised to abandon its 6.5 percent growth target within
two years as leaders push to contain asset bubbles and financial
leverage.
The Ministry of Environmental Protection’s new plan to
tackle winter air pollution focuses on Beijing, Tianjin, and the
provinces of Hebei, Henan, Shanxi and Shandong. It aims to reduce coal
consumption, used for power generation, and vehicle emissions.
Assuming production cuts are strictly implemented, industrial
production growth is likely to be 0.6 percentage point to 0.8 percentage
point lower than otherwise, while GDP growth will be 0.2 percentage
point to 0.25 percentage point lower in the next six months, Yao said.
Output Disruptions
"This campaign is likely to result in additional production
disruptions on top of the impact of the anti-air-pollution plan, as the
inspections may have led to the closure or production suspension of
factories throughout the country in a wide range of sectors," Yao wrote,
adding that supplier shutdowns could upset production by several major
carmakers.
She said that the push may have a lasting impact on local
officials’ behavior when it comes to balancing economic growth and
non-economic developments. Inspection results, she added, "are said to
have affected the potential promotions of thousands of officials, a
stern reminder to other officials that environmental production should
be given higher priority."
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