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Goal keeper

5 March 2015 By Peter Thal Larsen

China’s new target for GDP growth is a missed opportunity. Premier Li Keqiang says economic output will expand by “about 7 percent” this year. Though the lack of precision is welcome, the People’s Republic would be better off without its big, reassuring objective.

For most of the last decade, China’s annual growth target was actually a threshold: even when GDP was expanding at double-digit rates, the goal never exceeded 8 percent. In recent years, however, the target has become a leading indicator of the ruling Communist party’s willingness to accept a slowdown. Last year, China missed its growth objective for the first time since the late 1980s – though only by a tenth of a percentage point.

Planners seem to acknowledge the flaws in trying to steer the world’s second-largest economy towards a precise annual target. That explains the why the crucial number is prefixed with “about”. The vagueness shows Chinese leaders would be willing to accept growth of less than 7 percent this year, though it’s not clear how much of a shortfall they would tolerate.

Nevertheless, even a less precise target can lead to distortions. It encourages regional bureaucrats to prioritise short-term expansion over longer-term reforms or objectives that are less easy to quantify, like environmental sustainability. If China shows any sign of falling far short, officials will come under pressure to cut interest rates or loosen restrictions on credit. Any desire to avoid a big miss might also give China an added incentive to fudge GDP statistics, which many already regard as dubious.

Scrapping the target would be a sign of economic maturity. After all, no other large country claims to have the same level of control over its economy. Besides, leaders like Li regularly stress the importance of other measures like employment, which have more direct relevance to the population’s prosperity. That China is not yet ready to let go of its GDP goal suggests a truly enlightened way of thinking hasn’t yet taken hold.  

 

 

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