China's 'Guarantee' on Growth Sparks Doubt

An analysis by Michael Lelyveld
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Workers at a construction site in Beijing, July 14, 2013.
Workers at a construction site in Beijing, July 14, 2013.

China's government may be creating more uncertainties about its economic policies by promising to meet official growth goals in the second half of the year.

On July 31, state media reported that President Xi Jinping had promised to "guarantee" that this year's economic target of 7.5-percent growth in gross domestic product (GDP), a key benchmark of economic expansion, will be achieved.

Xi reportedly made the pledge at a Politburo meeting of the Communist Party's Central Committee to plan economic strategy.

"The meeting decided that China will 'maintain steady growth, adjust economic structure, and forge ahead with reform' to guarantee 'this year's key tasks for economic and social development will be fulfilled,'" the official Xinhua news agency and English-language China Daily reported.

It is unclear from the excerpt whether Xi or the official press used the word "guarantee," but the idea that economic growth rates can be predetermined may create more doubt than confidence in government policies.

"Macro policy should be stable, micro policy should be flexible and social policy should support the bottom line. All of them should be coordinated," the Politburo said in a less controversial statement.

Numbers 'cooked'

But the pledge to guarantee growth suggested the government might return to more stimulus spending or less restraint on property speculation if necessary, said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

"If they don't do those things, it almost ensures that the numbers will be cooked when the next GDP figures are released, so it is unusual," Hufbauer said.

The practice of setting official GDP targets, which is a relic of central planning, has always been problematic for an economy struggling to adopt market reforms.

"It reminds one of practices that were part of a supposedly bygone era, but maybe not so bygone," Hufbauer said.

In the past, provincial officials have routinely reported economic results that overachieve the targets by large margins to advance their careers.

The statistical fraud has masked the true state of the economy, making government targets a floor for official GDP reports rather than an accurate estimate in most previous years.

Data fabrication has been a perennial problem in China, despite efforts by the National Bureau of Statistics (NBS) to bring it under control.

Most recently on June 26, NBS director Ma Jiantang threatened "serious punishments" for exaggerating economic results.

"Ma added that some companies are providing false figures to the national statistics system, and that some local governments are also distorting statistics," China Daily reported at the time.

Hopes of recovery

On Friday, the NBS reported stronger growth for industrial output in July, raising hopes that a recovery may be in the works.

Production in July rose 9.7 percent from a year earlier, outpacing the 8.9-percent rate in June, the agency said.

This year's slowdown has created concern, however, as second quarter GDP growth slipped to 7.5 percent from 7.7 percent in the previous period, prompting fears that the economy may have been falling below government goals.

The trend has sparked speculation that China's new leaders will soften their stand against inflationary stimulus spending and unleash investment forces with new bank loans.

The Politburo growth pledge seems to be sending mixed signals after the Ministry of Industry and Information Technology issued orders on July 25 to some 1,400 companies in 19 industries to cut overcapacity.

"So, what's it going to be? Maintaining high-speed economic growth, or cleaning up overcapacity in steel, aluminum, cement and shipbuilding?" asked Bloomberg Businessweek on July 31.

"For now, Chinese officials are sounding like they want to have it both ways. That, however, may be an impossible proposition," the magazine said.

In one of the mixed signals, the central government seems to be taking no action to stem rising prices in the real estate market after announcing a 20-percent profit tax to curb speculation in March.

Builders and buyers have been ignoring the largely unenforced tax as property prices climb to new highs, challenging the government's push for sustainable development and urbanization for rural residents.

At the end of July, the China Real Estate Index System reported that new home prices in 100 monitored cities rose 7.9 percent from a year earlier, an even faster pace than the 7.4-percent growth in June.

July marked the eighth consecutive month of accelerating price growth, China Daily said.

Encouraging signal

Some observers believe the Politburo meeting sent an encouraging signal to property developers by backing away from earlier efforts to halt price growth.

Xu Shanda, former deputy director of the State Administration of Taxation, noted that the executive body's statement had dropped previous references to "curbing the property market."

"This a very important message ... which showed a new and different approach," state media quoted Xu as saying. The Politburo instead pledged to "promote the stable and healthy development of the real estate market."

The statement caused a 10-percent jump in the share prices of at least three real estate companies, Xinhua reported.

Aside from sending messages to the property market, the government may be signaling that it will soften its sustainable growth policies if real GDP falls below announced goals.

Hufbauer said officials have shown increased concern about the "effectiveness of credit expansion," or in other words, the ability of bank loans to deliver the goods on GDP growth rates.

"There's this unhappy disconnect," Hufbauer said. "It does reflect a certain nervousness."

The ferment in policy may also reflect a split between Xi and Premier Li Keqiang, who said in mid-July that the government "should not shift our policy orientation just because of temporary changes in economic indicators."

Xi Jinping may be showing more concern about the policy because of negative trends in the economy.

"I don't think Xi is on the same page, and Xi presumably has the last word on this," Hufbauer said.





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