China's new GDP growth target for 2016 was realistic and consistent with its potential growth strength, despite the current economic slowdown, according to a HSBC research report on Thursday.
China set this year's economic growth target at between 6.5 and 7 percent, and the average annual growth rate for the next five years at above 6.5 percent, on Saturday during the national legislature's annual session.
The new target comes as the Chinese economy posted its slowest economic expansion in 25 years last year, while other indicators point to further weakness.
"While the targets are ambitious, we don't think they are unrealistic," said the report, as HSBC still has confidence in supply side reform and the policymakers' facility to boost demand.
"While China's potential growth is no longer in double-digits, we estimate that it is still at least 7.5 percent," the report said, adding that the government had sufficient policy options available to boost domestic demand and bring growth closer to its potential.
Chinese leaders have stated that the economy has entered a "new normal" of slower growth as they are working to replace a worn-out growth model based on trade, investment and heavy industry with sustainable expansion driven by consumer spending and entrepreneurship.
To arrest the economic downturn during the transition, China cut the benchmark interest rates and reserve requirement ratio (RRR) for banks several times last year. Further cuts to the interest rates, by 50 basis points, and the RRR by 350 basis points, will be likely this year, the report said.
HSBC expects China to put more emphasis on fiscal policy this year to support growth, as the government raised the budget deficit to 3 percent of GDP in 2016, from 2.3 percent in 2015.
However, as the central government has "relatively little debt and sizeable fiscal reserves," it can further increase the deficit over the targeted 3 percent, if necessary, the report said.
With world trade volumes stagnant and consumption accounting for a larger share of China's economy, the report said government policy should stimulate domestic consumption and investment.
Without sufficient demand and investment to support supply-side reform, China's growth potential cannot be tapped, the report cautioned.
The report also said China's capital stock per worker, which points to productivity, is still about a fifth of the United States', and thus the room for catch-up growth is "far from exhausted."