An expected reduction in the growth target to 7 percent next year will cut government revenue

China's economic growth has slowed to 7.3 percent, the lowest in five and a half years, and it is unlikely the world's second-largest economy will achieve its original growth target of 7.5 percent this year.

Although it may recover slighly in the fourth quarter thanks to a rebound in the manufacturing sector and the government's loosening monetary and property-market policies, full-year growth is likely to stay at 7.4 percent.

But the top leadership seems satisfied with the growth. After the latest figure came out, senior officials including Premier Li Keqiang and Vice-Premier Zhang Gaoli said economic growth was in a "comfort zone" and that China can achieve its goal.

The country had set its growth target for this year at 7.5 percent. But since Li has said several times that growth close to 7.5 percent - meaning it can be slightly lower than that, is acceptable - it is likely that top policymakers will be reluctant to shore up the economy with massive stimulus. Nor will they further loosen the monetary stance.

What bolsters policymakers' confidence is the stable labor market. The employment rate in dozens of cities stood at about 5 percent while the number of newly created jobs exceeded expectations. In the first nine months of this year, 10.82 million new jobs were created, 160,000 more than a year ago and exceeding the government's full-year target of at least 10 million new jobs.

The top leadership has been increasingly sure since August that high growth is not necessarily the precondition for a stable labor market. Policymakers now believe reforms such as reducing taxes and government deregulation can also boost employment.

The other reason top policymakers are comfortable with slower growth is that the slowdown can help solve persistent economic problems such as over-reliance on the property market, industrial overcapacity, snowballing local government debt and slow progress in financial reforms.

Slower growth can also help China press ahead with its transition from an export-led economy to a consumption-led one. As growth slows, businesses, including government-run ones, will have to rely on innovation, management, efficiency and marketing diversity to remain viable. This will help improve the quality of the economy. In addition, a brake on economic growth fits in with the country's efforts to curb air pollution and protect the environment.

Bearing that in mind, the top leadership is highly likely to lower the economic growth target for next year to 7 percent.

With the less aggressive goal, the central government will have little pressure to pursue the growth rate but will focus more on economic restructuring. That means it will not need to resort to a big stimulus, which often comes with greater credit loosening, to keep the economy on a fast track.

If the central government lowers the growth target, local governments will follow suit. That adjustment will allow them to greatly temper their previous desperate pursuit of growth at the price of the environment, low efficiency and unchecked borrowing.

But slower economic growth will lead to a rapid slowdown in the growth of government fiscal income. As indirect taxes account for the bulk of the country's taxes, government incomes rely heavily on economic activities. In the first three quarters of this year, China's fiscal income stood at 10.64 trillion yuan ($1.74 trillion; 1.37 trillion euros), an increase of 8.1 percent. In September, income was 995.3 trillion yuan, a rise of 6.3 percent year-on-year. This showed that the economic slowdown greatly affected the growth in government income, which meant that the government would face some difficulties in spending and budget planning. Top authorities must be aware of the slowdown in fiscal growth and get used to it. It is important for them to stick to principles despite a tighter budget.

In addition, the global economic situation needs to be more closely monitored so that domestic policies can be adjusted accordingly.

The authors are Shanghai-based financial analysts. The views do not necessarily reflect those of China Daily.

(China Daily European Weekly 10/31/2014 page10)