China eyes fresh stimulus as economy stalls, sets 7pc growth floor

"The bottom line for economic growth is 7pc, and this bottom line must not be crossed," said Premier Li Keqiang, giving an explicit pledge to head off a hard-landing.

Mr Li's comments suggest a major shift in policy by Beijing, which has deliberately engineered a slow-down over recent months by squeezing credit. The government has been rattled by upheavals in the interbank market and has begun to heed warnings that the crackdown has gone too far.

"As long as the economic growth rate, employment and other indicators don't slip below our lower limit and inflation doesn't exceed our upper limit we'll focus on restructuring and pushing reforms," Mr Li said, according to Beijing News. The inflation cap is set at 3.5pc this year.

China's press reported plans for a fresh burst of spending on railways and infrastructure, including a $40bn project to build the world's longest undersea tunnel across the Bohai Strait.

"They are setting limits to the slow-down but this will be targeted stimulus. They won't throw money at anything," said David Bloom from HSBC.

Li Keqiang's new team is trying to shift to a healthier form of growth, rationing credit for steel, cement, and ship building, all sectors with huge overcapacity. Ting Lu from Bank of America said he is adopting a "loose fiscal, tight money" policy, the opposite of the West. This is intended to wean the country off credit, while steering government spending towards green energy, water projects, broadband, 4G mobile internet, and information technology. "Li sees no room on monetary easing," he said.

The new plans rely on a fresh urbanisation drive, with social housing to replace shanty towns that still hold 100m people, as well as reform of semi-feudal Hukou system that keeps peasant families trapped in the country.

Mr Li has vowed to break addiction to credit, which has mushroomed in five years from $9 trillion to $23 trillion, reaching 200pc of GDP. Fresh output created by each extra dollar of credit has fallen from a ratio of 0.85 in 2008 to nearer 0.2 today, proof of credit exhaustion.

The International Monetary Fund said last week that China must change course, warning that extreme debt levels leave the country at risk of "a shock that could trigger an adverse feedback loop."

The key worry is shadow banking, which has driven half all credit growth over the past year as banks seek ways to evade lending curbs. Fitch Ratings says wealth products worth $1.2 trillion pose a systemic risk since half the debt must be rolled over every three months.

China's economy grew 7.5pc in the second quarter from a year earlier but the figures are widely disputed. Diana Choyleva from Lombard Street Research says the economy contracted slightly over the quarter and may be in recession, if the data is calculated using a "GDP deflator" that better reflects Chinese output.

Mr Li admitted during his days as a regional party boss that official data is "man-made" and that electricity use, rail freight, and loans offer a better gauge. These three measures suggest that China's growth has slowed to 2pc.

The latest stimulus has echoes of last year when growth faded, causing the government to unleash yet another blitz of spending and credit. While the stimulus did boost growth late last year, the effect fizzled within months.

Mr Li is expected to take a more calibrated approach. An ardent reformer, he was sponsor of a report last year by the Development Research Council that called for revolutionary changes to China's structure. The study said China risks falling into the "middle income trap" that has blighted Latin America if it clings to its catch-up growth model, relying on over-investment in heavy industries, with cheap labour and imported know-how.

It said the Deng strategy that worked so well for 30 years has by now picked the low-hanging fruit. The next leap forward must come from a jump up the technology ladder. That in turn requires an end to top-down planning and the free flow of ideas.

It is far from clear whether the Communist Party is willing to relinquish tight control or its economic patronage machine. Mr Li faces an army of vested interests in the big state enterprises.

The IMF said China's reform rhetoric has not yet been matched by action. Investment is still at a world record 48pc of GDP, and consumption is still stuck at just 35pc. "Progress with rebalancing has been limited and is becoming increasingly urgent. A decisive shift toward a more consumer-based economy has yet to occur," it said.