China May Abandon GDP Growth Goal

An analysis by Michael Lelyveld
2015-11-02
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Members of the Communist Party of China (CPC) Central Committee, including President Xi Jinping (C) and Premier Li Keqiang (3rd R), meet to discuss economic reform and growth at the Fifth Plenary Session of the 18th CPC Central Committee in Beijing, Oct. 29, 2015.
Members of the Communist Party of China (CPC) Central Committee, including President Xi Jinping (C) and Premier Li Keqiang (3rd R), meet to discuss economic reform and growth at the Fifth Plenary Session of the 18th CPC Central Committee in Beijing, Oct. 29, 2015.
Xinhua

As China enters a new era of lower economic growth targets, there are questions about why the government is setting growth targets at all.

Last week, members of the Communist Party of China (CPC) Central Committee met to agree on a draft of the 13th Five-Year Plan for 2016 through 2020, including new goals for gross domestic product (GDP).

Expectations were high that the four-day meeting, known as the Fifth Plenum, would produce a statement on GDP targets after deliberation and debate, heeding the government's call to accept slower growth as the "new normal" for sustainable development and economic reform.

Predictions of economists quoted by state media converged on a slower-growth target of 6.5 percent, following a steady decline from rates of 7.3 percent in 2014, 7 percent in the first half and 6.9 percent in the third quarter this year.

China's growth target for 2015, at the end of the current five-year plan, was "about 7 percent."

But in its communiqué, the committee left outsiders and markets guessing at the new number after the official English-language China Daily reported that the decision would not be announced until next March, when the National People's Congress (NPC) is scheduled to ratify the five-year plan.

The communiqué said only that China will target "medium-high economic growth," according to the official Xinhua news agency.

Despite the suspense, outsiders have voiced skepticism that any real decision or debate has taken place.

"But, in fact, the language of the communiqué is determined well before the meeting even starts," The New York Times said in its Sinosphere blog.

"Plenums in the modern era have rarely been scenes of raucous intraparty debate. Instead, most policy disagreements are resolved among powerful officials ahead of the plenum," it said.

Indeed, a Xinhua preview on Oct. 12 slipped seamlessly between the future and present tense in covering expectations for the plenum and the decisions that had already been made at an earlier Politburo meeting under General Secretary and President Xi Jinping.

“While economic development will be the central task, a people-centered approach will be employed in the 2016-2020 plan," it said.

"The agreements coming out of the meeting include a regulation on clean governance and rules on sanctions of those who break party rules," Xinhua wrote in the next paragraph.

One-child policy ends

The major policy news to come out of the plenum was a decision to end China's one-child policy, allowing all couples to have two children and potentially affecting economic growth over time.

But on current economic issues, there was little to surprise as China continues its transition to a partially market-based economy while preserving party and central government controls.

On the control side, Xi has prefaced the entire five-year exercise with new conduct rules for party members that "separate CPC discipline from the law," so that officials and policies can be changed without warning or at will.

On the market side, the government plans to support growth by cutting red tape, nurturing innovation, encouraging consumption and the service sector, easing currency rules and boosting private investment in state-owned enterprises (SOEs) rather than big stimulus spending for smokestack industries.

Last week, a Xinhua "backgrounder" stressed that the official title of the last two five-year plans was changed to "'five-year guideline' to reflect a much more market-oriented economy."

But the change raises questions about why China is still setting GDP targets, which are seen as a relic of central planning and a command economy.

"In a market economy, you don't set GDP growth targets," said Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington.

Instead, regulators craft policies to promote growth, and the market economy responds as it will.

While target-setting in China is a reflection of economic policies, it also sends a political signal to provincial officials, said Scissors.

"The original part of this is telling provinces what to say their growth was," he said.

In the past, higher targets of 8 percent sent an expansionist signal, and provinces regularly reported double- digit growth in confidence that the central government wanted more production year after year.

With slower growth and pollution pressures, the government is sending the opposite signal with lower targets.

"They're trying to guide the target downward, and it's not that their economy is growing at that rate. They're telling everyone that growth is weakening, and it's okay to say that growth is weakening," Scissors said.

A ‘moderately prosperous’ society

On Sunday, Premier Li Keqiang said that growth of "at least 6.5 percent" was needed to create a "moderately prosperous" society by 2020, the South China Morning Post reported.

But it was unclear whether the figure represented a formal announcement of the government's goal. Li was speaking in Seoul to a business audience following a meeting with South Korean and Japanese leaders.

Last week, Li told CPC members that minimum annual growth of 6.53 percent was needed to achieve a "moderately prosperous society," according to unnamed sources cited Bloomberg News.

All such calculations stem from longstanding CPC promises related to jobs, per capita income and doubling China's 2010 GDP by 2020.

"Although not specifying exact growth rate targets for the 2016-2020 period, annual growth must stay above 6.5 percent to realize the economic growth target," Xinhua said on Saturday.

At a conference in Beijing on Sunday, Vice Premier Zhang Gaoli said the government will try to maintain average annual growth of 6.5 to 7 percent without "aggressive stimulus or blind expansion of investment," China Daily reported.

But if real growth has already slowed significantly, say, to less than 6 percent, as many economists suspect, the central government will need time to muster political support for its policies in party meetings and perhaps in the NPC.

The pressure for a return to major economic stimulus programs has been enormous, despite their legacy of shoddy construction, pollution and debt.

Some analysts believe growth has already dropped to around 4 percent or less, based on flat performance or declines in surrogate indicators like power consumption and rail freight.

Other China experts argue that official GDP figures are credible, citing expansion in the service sector. But if real GDP growth has fallen sharply, it could explain the delay in announcing a new target officially.

If the government decides to stop setting numerical targets altogether, it would need even more time to marshal political support, Scissors said.

So far, the government has not said what it will do if growth falls below target, turning the entire numerical exercise into a recipe for putting itself on the spot.

The combination of forces raises the possibility that if the government has settled on a new number, this may be last time that it sets a five-year growth goal.

"I think there's a pretty good argument that they should just drop this target," said Scissors. "The problem is that it's a big step. This is the guidance they've been offering. Everyone is focused on it."

A five-year numerical target also presents a problem if China's growth rates continue to decline, since it could imply economic contraction in later years, putting increasing pressure on the government.

The benefits of official GDP targets are hard to define. Even if they are seen as a substitute for economic forecasting, they are likely to need revision over a period of five years.

Five-year plans may continue to have value for social goals like poverty reduction, pollution control, economic liberalization and regulatory reforms. But GDP targets may only serve as a reminder that China's transition to a market economy will remain limited by elements of central planning.

Scissors rejects the idea that China should keep setting targets as long as its transition is incomplete.

"Even in a command economy, you can say GDP growth isn't our goal anymore," Scissors said, arguing that the government can measure its success in other terms such as quality of economic output, household income, employment or the environment.

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