JPMorgan Chase – Why China Can’t End Its Romance With GDP Growth Target
In a battle between those who love or hate China’s economic growth target, a compromise appears to have emerged: a goal low enough to be more easily ignored.
China’s leaders have an ambivalent relationship with the gross domestic product target they have set almost every year since the 1990s. It’s celebrated as the key to mobilizing millions of bureaucrats who compete for promotions by increasing growth rates in their provinces, and blamed for social evils from pollution to excessive investment and fake statistics.
Uncertainties caused by the coronavirus pandemic led Beijing to drop the numerical goal last year, and there were expectations party leaders would do the same for 2021. Instead, China’s Premier Li Keqiang on Friday set an objective of more than 6% growth, with annual targets likely until at least 2025.
Growing awareness of environmental destruction caused by the single-minded pursuit of GDP — a measure of the value of newly-produced goods and services in the economy — led the central government to begin warning about over-reliance on the goal more than a decade ago.
Regional officials had other ideas, competing to beat national targets by pursuing often-wasteful investment projects, due partly to a promotion assessment system that prioritized growth. The problem worsened after the global financial crisis as banks opened credit floodgates.
Influential officials like Ma Jun, a member of the central bank’s monetary policy committee, have recently argued for permanently dropping the target, as part of Beijing’s drive to lower debt-levels in the economy. Investment banks such as JPMorgan Chase & Co. and Nomura Holdings Inc. predicted there wouldn’t be a target this year.
But just days before Li’s speech at the National People’s Congress, there was pushback: well-connected economists declared that a specific target was needed as an “anchor” for the economy, with policy running the risk of becoming confused without it. Zhang Liqun, a researcher at a central government think-tank, told state media that “without a certain pace of expansion, the quality of the economy doesn’t have support.”
Those in favor of dropping the target say other goals should be prioritized, like raising household incomes, investing in education and technology, cutting debt-levels or reducing carbon emissions.
Even though it wasn’t abandoned, this year’s growth goal is the least ambitious in decades. Because of the pandemic-induced slump in the first half of 2020, China can easily meet it just by maintaining current levels of economic output. Meanwhile, economists in a Bloomberg survey forecast 8.4% expansion this year.
The lower target will encourage officials to focus on longer-term goals to create more “sustainable growth,” Li said.
“I think that’s a much better number than 8%,” Michael Pettis, a fellow at the Carnegie-Tsinghua Center in Beijing, said in an interview with Bloomberg TV. “If they had gone for 8% that would have been a terrible signal. 6% is manageable with high quality growth. Anything else requires a significant increase in non-productive investment and, of course, in debt.”
Retaining the target partly reflects how difficult it is to find an alternative to assess the performance of the millions of local officials in China. Metrics combining economic and environmental goals have been tested locally but failed to catch on.
“Gathering appropriate data can be difficult,” said Joan van Heijster, a researcher on China’s political economy at the University of Amsterdam. “This is a disadvantage of new indicators compared to the standardized and widely used GDP.”
The alternative goal most often proposed, unemployment, is unreliably-measured in China and can be gamed by local officials by ordering state companies to add staff to payrolls without paying them.
“Putting employment as the priority target is a problem from an operational perspective,” said Zhu Haibin, chief China economist at JPMorgan.
If the GDP goal can’t be eliminated entirely, it can be de-emphasized. That’s been the trend since President Xi Jinping assumed the party leadership in 2012. The following year the Communist Party’s powerful Organization Department, which controls official promotions, cautioned against “simple reliance” on GDP growth for assessing officials. Mentions of GDP in the party’s official newspaper have since plummeted.
Under Xi, top officials have been taken to task for their overzealousness. Zhou Benshun, the former Communist Party chief in the northern province of Hebei, made a televised admission of failings in 2013, saying: “I cared very much about development speed and economic volumes”. He was later detained on corruption charges.
“In most areas it is no longer the sole target criteria for cadres’ evaluation but combined with other factors such as environment, social stability, local income, budget and tax income,” said Thomas Heberer, a professor at the University of Duisburg-Essen.
The number of provinces that have repeatedly failed to meet national growth targets has surged during Xi’s tenure, with no apparent political consequences for their leadership, according to Houze Song, a research fellow at the Paulson Institute, a U.S. think-tank.
What Bloomberg Economics Says…
A GDP target is widely viewed as a major source of distortions in the economy, pushing officials to aim for growth even at the costs of excesses in credit and over reliance on investment.
For 2021, with the post-Covid recovery already set to push growth above 8%, the “above 6%” goal won’t have that distorting role. Even so, critics will argue — with some cause — that the government has missed an opportunity to signal transition to a more modern form of economic management.
— Chang Shu, chief Asia economist
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Provinces have also moderated their GDP goals, which used to be consistently much higher than the national target. That “shows that the association between GDP growth and cadre promotion had been relaxed, despite a clear time-lag,” said Yuxi Zhang, a researcher at Oxford University.
That foreshadows the approach taken nationally this year, reducing the target to allow a focus on other goals, without being able to abandon it entirely. For the first time in decades, China’s five-year plan to 2025 lacks a target for average growth, though it says annual goals will be made depending on the circumstances.
After decades of use, targeting a growth rate is “locked-in,” Zhang said. “Everyone hates it, but everyone understands it,” she added.