BEIJING—China lowered its economic growth forecast to about 7% this year at the opening of the country’s biggest political event of the year, ushering in what leaders have dubbed a “new normal” of slower growth in the world’s second-largest economy.
Premier Li Keqiang ’s speech on the economy opened the National People’s Congress, China’s annual legislative session. Last year’s goal was “about 7.5%” though when actual growth came in at 7.4%—the slowest in more than two decades—officials disputed that it represented a miss.
The economic mood is downshifting on almost every front in China, which means that as demand grows for better schools and pensions and cleaner skies, the government is in less and less of a position to provide.
The 7% target was widely expected amid sluggish domestic demand and a slow recovery in the global economy.
In recent weeks, Beijing has unveiled increasingly dramatic moves to spur bank lending in a bid to rekindle economic momentum. But such moves could set back its efforts to shift away from excessive reliance on exports, a bloated property market and government spending.
What strategy Chinese leaders pick matters on a global level. A plan that emphasizes short-term growth could give a boost to a world economy suffering from Europe’s malaise and an unsteady recovery in the U.S., but it could also raise questions about China’s long-term role as a global economic growth engine.
At home, leaders face pressure for more action. Many businesses say they don’t want to borrow or expand given weak demand. Smaller companies that do say banks are holding back credit because of worries about bad loans.
“Lower interest rates aren’t such a help,” said Chang Wenfei, general manager of Ake Electronics, a maker of smart gadgets in the southern city of Foshan.
On Thursday, China said it would raise military spending by about 10.1% this year, suggesting that the economic slowdown will have limited impact on modernization plans that include new submarines, aircraft carriers and stealth fighter jets.
“As a large country, China needs the military strength to be able to protect its national security and people,” said Fu Ying, a spokeswoman for the National People’s Congress. “Our history teaches us a lesson that when we lag behind, we come under attack. We won’t forget that.”
China’s defense budget rose by 12.2% last year to about $132 billion, second only to the U.S., although many foreign defense officials and experts say that China’s real military spending may be up to double the official figure. That would still fall far below the Pentagon’s proposed $585 billion spending plan for the coming year.
Meanwhile, income inequality, health care and pensions are among the public’s top concerns, according to state media surveys.
Another is a deteriorating environment, one of the consequences of decades of breakneck growth. A documentary released in recent days that is quietly critical of China’s environmental policies was viewed over 100 million times online, prompting censors to scramble to contain domestic coverage.
“I worry about not having social insurance,” said Yang Jiahua, a 54-year-old security guard at a toy factory in southern Guangdong province. “I keep working here hoping I’ll get a pension. Otherwise I would have been gone long ago. I feel miserable and depressed and don’t have much hope.”
Compounding the job for policy makers is a tighter fiscal environment. China raised its deficit target, which was 2.1% of gross domestic product in 2014, but some economists say China’s actual budget deficit may be closer to 7.5% of GDP, when off-the-book debt by local governments is taken into account. Many economists say they expect that to translate into more monetary easing and expanded government spending as momentum slips and more investors move capital overseas.
That could fuel an equity bubble and let industries off the hook about tackling overcapacity, widely evident in the property sector. In a scene playing out nationwide, dozens of residential towers ringing the northeastern port city of Dalian sit empty, many with Roman-style columns and balustrades evoking earlier days of excess before prices tumbled.
And while jobs have held up well a rise in the politically sensitive unemployment rate could lead to still more stimulus. The latest budget sticks to last year’s target of creating at least 10 million new jobs, though the economy far overshot that, with more than 13 million new jobs added last year.
State investment in the electricity grid is keeping copper wire makers afloat, said Zhang Xuhua, external trade manager of Jiangsu Shangshang Cable Group Co., but two years of tough times have dented industry confidence, he added.
Even companies poised to benefit from increased government spending on road, rail, water and electricity projects say state contracts hardly offset the impact of the broader slowdown.
“The bank credit situation still hasn’t improved very much,” added a cable-firm owner surnamed Bian in China’s eastern city of Yixing, a major copper manufacturing base, whose company recently folded.