The Fifth Session of the 11th National People’s Congress (NPC) convened on March 5. As expected, Chinese authorities have adjusted a few headline targets.

·Economic growth lowered from 8 percent last year to 7.5 percent this year;

·Create 9 million jobs (12 million were created last year) and keep the urban registered unemployment rate below 4.7 percent (it ended the year at 4.3 percent);

·Import and export growth of 10 percent each (versus 20.3 percent and 25.4 percent respectively in 2011);

·Inflation rate unchanged at 4 percent (versus an actual rate of 5.4 percent in 2011); and

·The budget deficit lowered from 2 percent in 2011 to 1.5 percent in 2012.

Taken as a collective, the narrative told through the targets are well within range, shaping a very conservative cyclical glide-path. Sure, monetary policy has an easing bias and fiscal policy will be supportive, but both are certainly less active than markets had expected. In fact, Premier Wen Jiabao has all but ruled out any Keynesian spending surge in 2012.

Beijing realizes that it is better to deal with the numerous problems that have piled up in recent years, notably: over-reliance on exports and investment; a bias favoring SOEs (state-owned-enterprises) to the detriment of private participation (especially SMEs); environmental degradation; weak innovation; income disparities, and so on.

To this end, the growth-at-all-cost mentality must end, and Wen’s “report on the work of the government” delivered at the NPC certainly provides the political cover for agents to stop being gung-ho about growth. Rather, the state will support the development of some sectors — especially consumption, rural development, green technology and innovation, while limiting the growth in others. The aim is to adjust the economic structure and improve the quality and efficiency of economic growth.

Premier Wen’s economic blueprint

Premier Wen opened the NPC with what is essentially a state of the nation address to 3,000 delegates. In a two-hour long speech, Wen drew a relatively sober line under the current administration. Stabilization is evidently the name of the game in the run-up to the once-in-a-decade leadership transition. Lower growth and higher inflation will be tolerated, exemplifying growing policy maturity aiming for “more sustainable and efficiency.”

Markets will be disappointed, but it is clear that policy is looking beyond the cyclical downturn. Monetary policy has an easing bias, and fiscal policy will be supportive — albeit less active than expected. It is better to pursue structural reforms while economic growth is in the high single digits, rather than wait until growth falls to 6 percent-5 percent. The lower growth target, combined with a conservative deficit, should anchor expectations, reducing the likelihood for a large-scale stimulus package.

After seven consecutive years of 8 percent, the growth target has been lowered by 0.5 pps to 7.5 percent. Recall that growth had beat the target last year by a full 1.2 pps. The new target is consistent with the 7 percent annual average set in the 12th Five-Year Plan (2011-15), which reflects a broadly shared acceptance that marginal gains in potential output are indeed diminishing — albeit gradually. China’s potential growth rate is down-trending, from around 10 percent during 2005-10, toward 7 percent in 2011-15.

7.5 percent is a signal meant to lower expectations and create space for structural reforms. The growth-at-all-cost model is dying, releasing pressure on decision-makers and agents in all sectors to accelerate “the transformation of the pattern of economic development and making economic development more sustainable and efficient, so as to achieve higher-level, higher-quality development over a longer period of time.”