What’s in a Number? For China’s Leaders, a Lot

March 03, 2014

Wall Street Journal’s Richard Silk interviews Professor Li Wei on his views regarding GDP target-setting. Is this planning “formality” actually detrimental to China’s long-term growth and sustainability?

After years as a planning formality, China’s official target for economic growth is posing a problem for the country’s leaders amid confusion about the signals the goal sends — and whether it even matters.

Premier Li Keqiang will announce the annual GDP target in a speech Wednesday to the legislature.

Some economists see the growth target as a holdover from the days of the planned economy and a symbol of short-term thinking. They say officials naturally will try to exceed the goal, generating growth without regard to environmental and social ills.

“Targeting has achieved the goal of providing economic development incentives, but it also created a whole host of problems with land policy, with local government debt, with the banking system and generally rising debt levels,” said Li Wei, an economics professor at Beijing’s Cheung Kong Graduate School of Business.

At issue for Chinese leaders is where to set the target, given that overall growth is slowing – perhaps even faster than Beijing would like. Setting a high target would show that the government still places a premium on growth. A lower target would signal that the government’s focus has shifted from growth at any cost to tackling debt, tax and other structural problems.

Local media, citing unidentified sources inside the government, say this year’s target is likely to repeat last year’s aim of “about 7.5%” growth. Officials may opt to soften their wording, calling the figure an “expectation” rather than a target, Mr. Li said.

For most of the past 20 years the target has been set between 7%-8%. In most years China exceeded it handily, on average by two percentage points. It missed only once, in 1998, by a whisker.

China’s gross domestic product grew 7.7% in 2013, the same as the year before. But with mounting debt and recent signs of weakness in the manufacturing sector, many economists doubt the economy can keep up a similar pace.

“I think fixing it at 7.5% will prove to be a very awkward situation for the government,” said Yao Wei, an economist at Société Générale. “It would be better to give themselves some leeway.”

China’s new leaders, who began taking office more than a year ago, started their term suggesting they wanted to stop years of profligate lending and cavalier investment by the government and state banks. They’ve called for letting market forces play a greater role in setting interest rates and the price of resources.  The central bank allowed a liquidity scare at mid-year to signal its diminishing tolerance for runaway lending.

Still, when stock markets took fright and a serious slowdown looked likely, policy makers moved quickly to shore up growth. Interest rates fell and government approvals for infrastructure projects were speeded up.

An ambitious goal this year would show that policy makers won’t stand for a rapid slowdown, especially after the broad-based sell-off of emerging market assets over the past year and growing concerns about the strength of China’s economy.

“Given all the stress out there and worry about the impact of reform, I think a solid 7.5% target will send a strong signal that Beijing will support growth,” said Stephen Green, chief China economist at Standard Chartered Bank.

The government has tweaked other targets to better reflect reality and expectations. Industrial output grew at 9.7% last year, missing the 10% target. The government said last month that this year’s objective for industrial output has been lowered to growth of “about 9.5%,” stressing that the “quality” of growth matters as much as the speed.

Some in the reform camp in China’s government might be willing to accept slower growth. At a U.S.-China summit in Washington last year, Finance Minister Lou Jiwei suggested that growth of 6.5% wouldn’t be “a big problem.”

Premier Li Keqiang, who is largely responsible for the day-to-day management of the economy, said in November that 7.2% growth would be enough for the country to hit its employment targets. Those are a priority for the government, even though economists say the relationship between growth and jobs is not clear-cut.

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