‘GDP worship' undermining ChinaComment on this story
This week, world leaders, corporate executives and hedge-fund managers will return to a collective obsession: China’s growth target for the year ahead. The eyes of the world will be on Premier Li Keqiang to see if he again sets the number above 7 percent, a kind of comfort zone for officials from Singapore to Sao Paulo.
But wouldn’t it be great if Li, during his National People’s Congress speech, declined to offer a specific number and said: “The Chinese government will do all in our power to maintain gross domestic product growth (GDP), but from now on, we will do so without the pressure to meet some arbitrary GDP figure”? For China to get off the growth treadmill would be a giant reform on its own. Why? Well, there are at least three major challenges China will never be able to address if leaders feel obliged to keep growth above a specified level: local government finances, pollution and the shadow-banking system.
The way a regional official gets a meeting with Li or his boss, President Xi Jinping, is to produce monster GDP readings. Remember Bo Xilai, the former Chongqing bigwig now spending life in a jail cell? He became a celebrity by generating mega- projects, a swelling skyline and an outsized contribution to national GDP year after year. There’s still too much of an incentive for local officials to borrow with abandon to build new ghost cities, white-elephant shopping malls and airports devoid of flights, purely to gin up growth.
Pollution, meanwhile, may now be Beijing’s biggest challenge. Thick smog regularly blankets northern China, enraging parents, creating a generation of children who can’t play outdoors, and making the mainland a no-go zone for many expats. But Xi is keen to sell the “Chinese Dream” to 1.3 billion people who want to become wealthier. For many Chinese, a key metric is owning a car. Last year, Chinese consumers bought 22 million vehicles; that number is expected to reach 30 million by 2020.
Then there’s the problem of coal, which powers most of China’s factories. No balancing act is more treacherous for Xi and Li than finding a way to grow rapidly while also reducing the concentration of PM 2.5 pollutants, the small particles in the air that pose the greatest risk to human health. Yet with government officials pressuring giant state-owned enterprises to boost GDP, PM 2.5 levels will continue to surge.
The third problem area, shadow banking, really blossomed after the global financial crisis. As a traumatised world was dusting itself off from the collapse of Lehman Brothers Holdings, non-bank financial intermediaries were going mainstream in Asia’s biggest economy and propping up growth.
The more Beijing’s focus remains on GDP, the less incentive officials have to rein in the murky industry, which is raising fears that China may be headed for a Japan-like debt crisis.
It’s odd, frankly, to hear Chinese Finance Minister Lou Jiwei saying possible defaults in some wealth-management products aren’t a harbinger of “big problems” for the industry. Lou told Bloomberg News that “shadow banking in our country is still related to the real economy”, whereas in Western economies, shadow-banking products such as credit-default swaps are “far from real economic activities on the ground.”
Isn’t that the problem? I’m not defending the orgy of special-investment vehicles and off-balance-sheet shenanigans that undid Wall Street. But is it really a good thing when nontransparent, runaway lending is driving an $8.2 trillion (R88.4 trillion) economy? Consider me unconvinced.
All of this explains why one day the People’s Bank of China clamps down on credit, only to veer in the other direction the next. It’s all about the almighty growth rate.
Markets bear some responsibility for trapping China into reckless borrowing and lending. On Thursday, Templeton Emerging Markets Group warned of civil unrest in China should GDP slow to below 6 percent.
These kinds of scare statements box investors into a mindset that China is just a percentage point or two away from becoming Ukraine. They also make Beijing loath to disappoint markets, lest multinational companies make a beeline for the Philippines or Indonesia.
This “GDP worship”, as the official Xinhua News Agency calls it, must end. In fact, the success of the reform process Xi and Li unveiled in November may depend on it. Steps to embolden the private sector, relax the one-child policy, create a thriving services sector, change the “hukou” system of residence permits, and create a better social safety net will put China on firmer footing for many years to come. But seeing many of these changes through will be hugely disorienting and destabilising. The challenge would be easier for Xi and Li to manage if they weren’t chained to some artificial growth number.
William Pesek is a Bloomberg View columnist. Follow him on Twitter at @williampesek.