BY PETE SWEENEY

China is preparing to set its most important GDP target since the global financial crisis. The country faces an unprecedented swathe of economic challenges, implying a significant downward revision to growth goals from the “above 6%” for 2021 to something that signals sustained pressure on bad debt. What President Xi Jinping chooses will measure his power to drag China onto a less wasteful development path.

The Chinese Communist Party has every reason to downgrade expectations as flattering comparisons to earlier Covid-19 damage fade. Beyond the threat from new variants, authorities in Beijing have initiated a broad campaign to curb financial risk in the property sector, which contributes between a quarter and a third of the country’s economic activity. They have their work cut out ensuring a sector shaken by China Evergrande and others doesn’t collapse, including seeing that $2.5 trillion of pre-sold properties are completed to fend off a crash in consumer confidence.

Retail sales, domestic tourism and the services sector have lagged under lockdown, but their malaise was offset somewhat by export demand for medical supplies and e-commerce. As trading partners normalise, however, that is unlikely to be sustained. As for productivity gains, they have been dragging on China’s economic growth, not contributing. Prioritising state enterprises exacerbates the latter trend.

After just 4.9% expansion in the third quarter, a 2022 slowdown is widely expected. It could get ugly. Xi is trying to keep investors convinced that “flood-like stimulus” is not imminent, which means refraining from big interest- rate cuts while digesting loan and bond defaults. That implies growth closer to 4%, well short of the 5.5% or so that government advisers are pushing.

A more conservative target would indicate Xi is serious about reshaping the $15 trillion economy. The danger is that bureaucrats freeze up, as they did during a 2015 anti- corruption campaign. It also would strain local government finances. The alternative, though, is re-warming investment in housing and infrastructure, which would keep output imbalanced, further stretch China’s debt-to-GDP ratio and encourage investors to discount tough deleveraging talk.

If Xi can force the system to stay on its credit diet, however painful, it will be the strongest sign yet of his clout.

First published December 2021