Wen likely to set lower target for GDP growth

PUBLISHED : Monday, 14 February, 2011, 12:00am
UPDATED : Monday, 14 February, 2011, 12:00am

When Premier Wen Jiabao walks to the podium of the Great Hall of the People and delivers his annual government work report on March 5, he will most likely describe national development last year as 'truly extraordinary'. Admittedly he freely used the label in almost all his previous state of the union addresses. But looking at it from all perspectives, such a description for last year would be a fitting one.

After 'the most difficult year', in 2009, when the mainland started to pump four trillion yuan (HK$4.73 trillion) into the economy to deal with the onslaught of the global economic crisis, China became one of the first countries to stage a rebound last year.

But in the early part of the year, the mainland's leadership was caught in an acute dilemma: on the one hand, there were real concerns over international uncertainties, including the risks of a double-dip recession, and on the other hand, signs of overheating, particularly in the property sector, emerged as a result of ample liquidity.

By the time the leaders decided to shift their stance from a super-loose monetary policy to a prudent one, economic overheating had accelerated.

In the fourth quarter, gross domestic product surged 9.8 per cent year on year, up from 9.6 per cent in the third quarter. For the whole year, GDP rose 10.3 per cent, up from 9.2 per cent in 2009 and way over the government target of 8 per cent.

More ominously, inflation has begun to accelerate. The benchmark consumer price index rose to a high of 5.1 per cent in November. Although it softened to 4.6 per cent in December, economists generally expect it to rebound to 5.2 per cent or even higher when January inflation figures are released tomorrow. That partly explains why the People's Bank of China raised interest rates again last Tuesday, the third rise in four months. This followed a first surprise rise in October and the second on Christmas Day.

However, this is not over yet, as economists generally agree there should be more rises in interest rates and commercial banks' reserve ratios in the coming months.

Despite the tightening, however, many economists have argued that starting from the Year of the Rabbit, the mainland's economy is expected to enter a new cycle of 'high inflation and high growth'. This scenario will prove challenging for the mainland's leadership at a time when they intend to shift growth into a lower gear as part of efforts to rebalance the economy away from being led by investment and exports to being consumption-based.

Indeed, over the past few years, the leaders have repeatedly argued the present growth path is 'unbalanced, unco-ordinated, and unsustainable' because the rapid growth has put considerable strain on natural resources like land, energy, and the environment. As this year marks the start of the 12th five-year plan, Wen is expected to set the tone and announce a 7 per cent target for annual economic growth, less than the 8 per cent target for the past five years.

The central government is also setting more binding targets for emissions and unit costs in the new five-year plan to force local authorities to pay more attention to environmental protection and conservation of resources and energy. But this will prove a tough sell. By now, almost all the mainland's 30-odd provinces and municipalities have announced their own five-year plans approved by their regional people's congresses. Their obsession with massive spending to boost GDP growth has remained unchanged.

Only a few provinces and municipalities - including Beijing, Shanghai, Guangdong, Zhejiang and Jiangsu in the developed coastal region - set their growth targets between 8 and 10 per cent for this year. In the western, central, and northeastern regions, almost all of them plan double-digit growth targets averaging 12 per cent or higher, with Chongqing leading at 13.5 per cent.

Last month, Zhang Ping, the minister in charge of the National Development and Reform Commission, voiced concern that many provinces had set their targets too high. But the central government will find it very difficult to rein in the enthusiasm for spending, not only because the old habits of pursuing GDP growth die hard, particularly in the first year of the new five-year plan.

More importantly, the mainland has entered its own peculiar cycle in which reshuffles at the provincial levels have already begun, leading to the reshuffle of the Communist Party's top leadership in the autumn of next year. Both the incoming leaders and outgoing ones desire higher GDP growth rates and mega-projects as crowning achievements.

Another, rarely mentioned, reason is that provincial officials mainly pay lip service to the mainland's leadership these days, giving rise to the popular saying that central government directives rarely make their way out of Zhongnanhai.

So, more extraordinary years ahead.