China tends to produce large numbers. Li Keqiang, the country’s premier, yesterday outlined a 2014 GDP growth target to Beijing’s rubber-stamp parliament of 7.5 per cent. That’s the kind of economic expansion Western states (even a now fast-recovering Britain) can only fantasise about. But, of course, by Chinese standards 7.5 per cent is nothing special. Indeed, this would represent the country’s weakest annual growth rate since 1990.
GDP growth matters, especially for a country playing economic catch-up like China. But it is becoming increasingly clear that this is the wrong target for the Beijing government to be aiming for.
The single GDP figure hides a multitude of dangers and distortions. Since the global credit crisis of 2008, China has become excessively reliant on infrastructure spending and capital investment to drive growth. Investment spending as a share of GDP is close to 50 per cent, well above the level deemed sustainable for even fast-developing countries like China.
And this investment has been financed by an unprecedented splurge of credit. Total private credit in the economy has soared from 140 per cent of GDP to more than 200 per cent in the space of only six years. This borrowing bonanza has mostly been financed, or facilitated, by state-controlled banks which are now, inevitably, sitting on a mountain of non-performing loans (even if the lenders themselves continue to report healthy balance sheets). Beijing has the financial firepower to recapitalise its sickly banks, but the risk of a financial crisis cannot be discounted.
Another illness concealed by robust GDP figures in recent years has been the inordinate damage inflicted on the environment by China’s energy-intensive growth. The choking smog of Beijing and the stress on China’s water supply are testament to the immense damage done.
The administration of President Xi Jinping last year outlined a sensible plan to rebalance the economy away from investment and credit and towards consumer consumption and cleaner growth. This contained many sound proposals, such as relaxing the one-child policy, easing residency restrictions, improving welfare coverage and liberalising China’s financial sector. But the question is whether this programme can be delivered when there are so many powerful vested interests that profit so handsomely from the present lopsided and polluting growth model. The danger of a concentration on GDP by officials is that it will boost the temptation for China’s politicians to soft pedal necessary reforms, or even to pull the old investment and credit levers to keep the growth number pumped up.
There are other economic measures that should be monitored more closely, including workers’ wages, consumption and carbon dioxide emissions. China’s GDP growth could moderate to, perhaps, 5 per cent and yet produce more sustainable and better balanced development than hitting 7.5 per cent under the old credit-intensive model.
Beijing must not fall into the trap of regarding a high GDP growth figure as the primary measure of its success. Quality and sustainability matter more than quantity. Even in China, bigger does not always mean better.