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A morning view of the Lujiazui area in Pudong, Shanghai. On the bright side, China has had significant economic successes since 2010, albeit on soft issues like poverty alleviation and welfare support that do not make ready headlines. Photo: Xinhua
Opinion
The View
by Richard Harris
The View
by Richard Harris

China’s Li Keqiang presents an economy in distress in NPC speech. Is it just growing pains?

  • The lack of an accurate GDP growth figure means the true state of the Chinese economy, now facing its slowest growth in almost 30 years, remains guesswork, heightening worries over debt and unemployment
Richard Harris
Richard Harris
Why you can trust SCMP
Spare a thought for poor Li Keqiang, premier of the People’s Republic of China, having to present the state of the Chinese economy to the people at the National People’s Congress earlier this week. China’s economy is growing at its slowest rate in almost 30 years. As the boss (well, nearly), reporting on a control and command economy is easy when things are going well – and painful when it’s in reverse.
We ought to remember that Li is a highly competent economist, with a PhD in economics and whose work was awarded China's highest national prize in economics in 1996. Yet reporting that the authorities were now targeting 6-6.5 per cent gross domestic product growth was a tough gig.
The GDP growth figure is both iconic and controversial. The government has its proverbials in a twist by presenting misleading official numbers with a straight face for several years now that are at odds with what is really happening on the ground.

In some ways, that was understandable when the prevailing (if incorrect) logic was that GDP growth was related to social order. As growth has fallen and order has endured, it seems that it has less to do with GDP growth than how the Communist Party manages inevitable, periodic downturns.

The official growth number is unfortunately taken as gospel by official channels; the World Bank, the IMF, and major banks included. They should be ashamed of themselves for parroting a figure for fear of offending someone. Despite widespread disbelief, the official GDP growth number remains at the heart of all Chinese economic calculations.

Indeed the famous “Li Keqiang Index” (calculated by The Economist magazine) was inspired by an alleged comment (revealed by WikiLeaks) by Li, then party secretary of Liaoning, to an American diplomat. Li apparently regarded the Liaoning GDP figures as “man-made” and unreliable. The competent economist in him preferred to use indicators like railway cargo volume, electricity consumption and bank credit. And so should we.

Talk of stability in China is empty without confidence and reform

Morgan Stanley estimates that China must post growth of 6.2 per cent this year to satisfy the authorities’ aim of doubling the size of the economy in the 2010s. The maths of GDP is important. If you grow an economy by 6-8 per cent per annum for a number of years, you get quite a large figure. If it is not growing that fast, the economy is actually much smaller; and placing reliance on important metrics like GDP per capita or debt as a percentage of GDP becomes dangerously misleading.

We all hope that by some miracle, the economy turns around and fills the gap between official and actual growth – but it seems unlikely any time soon in a maturing economy of close to 1.4 billion people.

Aside from the dodgy GDP figure, Li did not hide reality. “We must be fully prepared for a tough struggle,” he said. China’s challenges are “graver and more complicated” than in the past and to achieve its growth target, the government would pursue measures “with greater intensity and enhance its performance”.

There were a lot of measures mentioned despite some of the rhetoric being faintly reminiscent of Goldilocks. The government will continue its “prudent” monetary policy, easing or tightening “to the right degree”, said the premier.

As good Keynesians, China’s policymakers will spend their way out of trouble on infrastructure and defence. Specific tax and fee cuts will assist selected industries and the vulnerable. There are already grumbles that the tax cuts are insufficient for industries with margin and competition pressures.
Such spending means a higher 2019 budget deficit-to-GDP ratio of 2.8 per cent, if you believe the GDP figure. Permission for extra issuance of local government “special purpose” bonds, not counted as government debt, previously fed the infrastructure, property and corruption bubbles. Li, ever the Goldilocks economist, said that the People’s Bank of China would not trigger a massive stimulus campaign to boost growth.
The most worrying aspect of the speech is that surveyed urban unemployment, at 5.5 per cent, is higher than official estimates and nearly 70 per cent of the euro-zone average. The devil has work for idle hands and an employment-first policy is now a top priority with the target set at within 4.5 per cent. “Employment is the cornerstone of well-being, wellspring of wealth,” Li said.
The decline in foreign demand has made unemployment and recruitment visible issues. Cissy Zhou’s excellent piece of SCMP grass-roots journalism about seeking a job in Zhengzhou with Apple contractor Foxconn is essential reading.
On the bright side, China has had significant economic successes since 2010, albeit on soft issues like poverty alleviation and welfare support that do not make ready headlines. The stock market has also soared 25 per cent this year, with foreigners buying leading-edge Chinese company shares when they are cheap. Those who study history see these moments as merely growing pains from which China’s economy will emerge – not as developing, but as developed.

Richard Harris is chief executive of Port Shelter Investment, a veteran investment manager, banker, writer and broadcaster, and financial expert witness

This article appeared in the South China Morning Post print edition as: Li and economic reality
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