China’s leadership has always seen gross domestic product (GDP) numbers as the most important indicator of their ability of govern; thus their whole apparatus does whatever it can, in terms of policies, to make sure a politically acceptable growth rate is achieved.
With a persistent slowdown, the government has to adjust its target to a maximised but achievable goal. Between 2010 and 2015, the world’s second-largest economy witnessed a steady slowdown, with annual percentage growth rates of 10.5, 9.5, 7.9, 7.8, 7.3 and 6.9, respectively. Averaged annual GDP growth rates between 1989 and 2009 were around 10 per cent.
Last year, the government set a range of 6.5 per cent to 7 per cent as a growth target, the lowest in decades. As expected, China is on track to meet that 2016 goal after three straight quarters of 6.7 per cent expansion.
However, such growth was achieved with an expansive fiscal policy, higher government spending, a housing rally, ultra-loose monetary conditions and record bank lending, which have also led to an explosive increase in debt.
Government spending from January to September 2016 was 12.5 per cent up on the same period a year earlier, while revenues increased by 5.9 per cent. Of the 8.2 per cent overall growth in fixed-asset investment in the period, state firms jumped by 21.1 per cent and private firms rose 2.5 per cent.
In the previous year, state firms registered a much more moderate 10.9 per cent in fixed-asset investment, year on year, while private investment went up by 10.1 per cent.
Recent growth has been achieved with the help of record bank lending, which is on pace to top 2015’s record 11.71 trillion yuan (HK$12.2 trillion). Last year, the central bank injected a net 1.5 trillion yuan into money markets through open market operations, many multiples of its net 10 billion yuan injection in 2015.
The eased monetary policy helped stoke a housing boom that saw prices rise to a historic 12.6 per cent year on year in November and made houses in Chinese cities among the least affordable in the world.
The state investment-fuelled growth led to alarming combined public and private debt of 260 per cent of GDP by the end of last year, the highest debt-to-GDP ratio in the world. The Bank for International Settlements (BIS) recently warned this was excessive and dangerous. In the first six months of last year, China’s domestic debt ratio rose by an astonishing 28 per cent of GDP.
Last year the party set a target of 6.5 per cent annual growth for five years through to 2020, in its 13th five-year plan, just to meet the leadership’s promise of doubling the country’s economic size and per capita income from 2010 to 2020, a political symbol of building a “moderately prosperous society”.
To support such short-term growth, the government had to delay, stall or even hold back some sorely needed reform measures which will help regain long-term growth momentum.
Realising the challenge of taming asset bubbles, solving rising bad debt and checking unbalanced growth, the leadership recently pledged to shift its focus away from growth towards dealing with risks this year.
If the leadership makes good on what they claimed – giving market forces a decisive role in the distribution of resources – they should abandon arbitrary growth targets, a remnant a Stalinist command economy.
China’s economy is going through a critical transition, from manufacturing-oriented and state investment-fuelled expansion to service-centred and consumption-driven growth. What the government should do is push forward reforms that remove the obstacles to such transitions. ■