China should prioritise reforms over GDP growth target

Hu Shuli fears the 7.5 per cent goal for this year may encourage officials to fall back on stimulus measures that will ultimately harm development

PUBLISHED : Wednesday, 19 March, 2014, 12:35pm
UPDATED : Thursday, 20 March, 2014, 2:25am

With the close of China's annual legislative sessions, what do we make of the mixed signals about the economy? Recently released survey data suggests that the first-quarter numbers will be worse than expected. With the government setting a gross domestic product growth target of "around 7.5 per cent" this year, will reforms once again be shelved to ensure growth?

The answers to such questions depend on whether government leaders have the stomach for a slowdown.

Chinese policymakers typically set growth targets, but these are outliving their usefulness.

Too often, officials are so obsessed with meeting these targets that, when changes in the external environment make this impossible, they quickly reach for stimulus measures. Such zeal encourages policy mistakes, leading to problems such as overcapacity and high government debt, further delaying needed economic restructuring.

No doubt, China's GDP target has in recent years become a little less of a goal to be attained at all costs. Premier Li Keqiang also said last year that margins around a target are acceptable. This is an improvement.

But even if the government seems to understand in theory the necessity for slower economic growth, in practice it continues to overly value GDP numbers.

It's worrying that, in media interviews, many local officials appeared to be raring to go with one project or another. When unveiling this year's growth target, Li made it clear that he is allowing for some flexibility and tolerance, and said jobs were a key concern. But he did not specify any limits.

It's all too easy for officials, particularly those in local governments, to fall into their old habit of stoking the economic engine at the expense of necessary reforms.

The Chinese economy has fundamentally changed. Many scholars point out that, even as the country continues to urbanise, the demand for housing, roads and other infrastructure - and the related demand for steel and other construction material - are nearing their peaks.

The period of rapid growth is over, and the factors that spur growth are also changing. China can no longer rely on massive investment to develop its economy. Increasingly, it must create growth through technology and innovation.

To realise its goal of steady growth, China must now value the quality of development over quantity, the long term over the short. This means staying the course of enacting comprehensive reforms.

In practice, this means the central government must resist the temptation to use macroeconomic policy adjustments to quietly boost growth, even if it does not roll out a stimulus package. The same goes for local officials. Otherwise, we will see yet another batch of ineffective, inefficient government projects that inflate the numbers in the short term but will actually harm the country's sustainable development.

By contrast, the economy will benefit from the reforms that leaders have pledged to undertake this year: clarifying and setting limits on government power; improving the business registration system, tax system and financial system; and reforming state-owned enterprises.

These reforms are the root cure of China's economic malaise. Forcing this bitter medicine on a reluctant patient requires grit on the part of the reformers.

Further, though restructuring is inevitable, a slower pace of growth may not necessarily lead to job losses. Last year, the service sector accounted for 46.1 per cent of GDP, outperforming the industrial sector for the first time. With growth comes the potential for job creation. We are confident that as the sector opens up, we'll see more, not fewer, job opportunities.

More can be done to help develop the sector, too. The more traditional services will benefit from modern management know-how and skills training; services catering to the production process should be upgraded; services in the knowledge and hi-tech industries will need more qualified workers. This means greater investment in education and skills training.

We must take the long view. Such investments may not bring immediate results, but they are necessary for future growth.

Governments in market economies do not set GDP growth targets. That Chinese policymakers do so makes it a habit "with Chinese characteristics". How leaders balance growth with reform will test their commitment to reform.

At his press conference last week, Premier Li said: "Last year, without taking any additional short-term stimulus measures, we succeeded in meeting our target. Why can't we do that this year?" This is encouraging.

We look forward to the day when the Chinese government stops setting GDP targets, because that will be the day a market economy is in place and the work of reform is truly done.

This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine.