Should China abandon its growth target?

Economists are questioning the wisdom behind Beijing's official commitment to grow the economy at 7.5 per cent.

Graph for Should China abandon its growth target?

China’'s Finance Minister Lou Jiwei listens to a question from a reporter at a news conference during the annual meeting of China’s legislature in Beijing, China Thursday, March 6, 2014. (AP Photo/Andy Wong)

Premier Li Keqiang has told the annual gathering of China’s parliament that the government’s goal for 2014 is to maintain 7.5 per cent growth in GDP. The announcement of the goal has disappointed more than a few economists.

They believe Beijing should pay less attention to, or even abandon formal GDP growth targets. It is a litmus test of Beijing’s resolve to implement hard reforms to address the country’s deep structural problems, says UBS chief China economist, Wang Tao.

If the government sets the goal too high or places too much emphasis on GDP growth, it means that Beijing is more likely to rely on old tricks such as infrastructure spending and credit expansion to prop up the economy.

It goes against the fundamental principle of Beijing’s own reform goal to let the market decide how to allocate resources. Goldman Sachs’ chief investment strategist in China Ha Jiming believes there will be a major correction in the economy if imbalanced growth is not addressed.

So is it sensible for Beijing to maintain an official commitment to grow the economy at about 7.5 per cent? Does it mean that it is less willing to take bold reform measures to address deep structural problems?

Chinese finance minister Lou Jiwei, who was formerly in charge of the country’s $600 billion-plus sovereign wealth fund, explains why Beijing wants and needs to maintain a growth rate of about 7.5 per cent.

He says job creation is more important than the GDP growth target and that Beijing needs to create 10 million new jobs in urban areas in 2014 to maintain a 4.6 per cent unemployment rate. In fact, Beijing has repeatedly emphasized employment as its number one concern.

“It does not matter whether the GDP grows faster than 7.5 per cent or below 7.5 per cent. What matters is employment,” said Lou in a press conference yesterday.

Beijing believes GDP growth at 7.5 per cent is a necessary condition to absorb new entrants to the job market. Just to give you an example of the country’s dire employment situation, there were close to 7 million new university graduates in the country last year looking for jobs.

Lou emphasizes three top economic goals for 2014 -- keeping the unemployment rate below 4.6 per cent, keeping inflation below 3.5 per cent and maintaining GDP growth at around about 7.5 per cent. These goals need to be considered as a package, he says.

In addition, Beijing is also conscious of the ability of the economy to absorb shocks if supporting policy measures such as cheap credit are to be withdrawn quickly.

Liu Shijing, a vice-minister of the Development Research Centre of the State Council warns that nearly half of China’s companies will be in the red when economic growth dips below 7 per cent.

This should not come as a surprise considering the rapid increase in the costs of production in China including wages, energy bills, lands and raw materials. For example, the wages of Chinese workers are about five times that of their counterparts in Vietnam. An appreciating yuan, despite its recent fall, has also squeezed the already thin margins of Chinese companies.

In comparison, American companies are mostly profitable with US economic growth hovering around 2 to 3 per cent and Japanese firms still make money when the economy is hardly growing at all.

That is why Beijing is placing a lot of emphasis on innovation and is encouraging Chinese companies to upgrade their technology and move into new growth and high tech sectors.

In essence, Beijing is not confident about the ability of the economy to absorb sudden shocks if it tries to change the economic structure too fast. It is also worth pointing out that Beijing is never a big fan of shock therapy.

Chinese policymakers hold up the disastrous results of radical reform in Russia and Eastern Europe after the fall of the Berlin Wall as examples of what not to do. It is clear that the Chinese government prefers stability to uncertainty in the short term.

Though it may be sensible for China to take a steady-as-she-goes approach at the moment, it cannot afford to be complacent about the need to change its old debt-fuelled investment driven economic model.

The country still has a crucial window of opportunity to change while the economy is still relatively strong and fiscal conditions are reasonable (Beijing reforms race rising debt, 21 January). But this opportunity is closing fast and China cannot afford to lose another lost decade of inaction like we saw under the previous Hu-Wen administration.

Follow Peter Cai on Twitter: @peteryuancai
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