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Getting Used to Slower Growth in China: Quality over Quantity

by | June 6th, 2013 | 02:20 pm
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Since the reform era began, high GDP growth has been important to a successful career in Chinese politics particularly at the local level. The new Xi-Li administration is now hoping to change that. Since the 18th party congress, Chinese new Xi-Li administrations have emphasized improving the quality and efficiency of growth (提高质量和效益) and repeated the importance of slower growth to achieving rebalancing in China.

This week, the National Bureau of Statistics (NBS) laid out the administration’s argument for slower growth expectations quite clearly in two papers concerning – “maintaining the right speed, realizing quality growth” (坚持正确速度观 实现有质量有效益增长).  The main message for both outside observers and local government officials is to get comfortable with the number 7.

Economic forecasters are beginning to agree. Most forecasters have slashed Chinese 2013 growth rates lower and lower. Consensus Economics surveys of 180 different Asia Pacific forecasters show the mean forecast for China’s 2013 real GDP growth has fallen from 8.5 percent in May 2012 to 7.9 percent last month. More recently the IMF cut its GDP growth forecast for China from 8 percent to 7.75 percent. That is down from 8.8 percent a year ago. Keep in mind, the 7.5 percent growth target set in 2012 has not been adjusted at all over this period.

China GDP Growth Forecast_Graph_662013

So far downgrades are mostly a reaction to weaker demand in 2012 and the beginning of 2013 while forecasters remain divided on the credibility of sustained lower growth. Some still believe growth will pick up above 8 percent in 2014 and 2015. After-all this is not the first time Chinese leaders have called for slower growth. Between 2005 and 2011 the Hu-Wen administration maintained an 8 percent growth target. Meanwhile, China’s GDP growth soured to an average of 10.9 percent.

But, the Xi-Li administration appears more committed to its 7.5 percent growth target for 2013 and an average of 7 percent growth target by the end of the 12 five year plan in 2015. China’s GDP growth rate has been below 8 percent since the second quarter of 2012. In spite of numerous predictions that the new administration would cut down macroprudential controls on real estate and local government debt after the 18th party congress in November; after the Central Economic Work Conference in December; after the National Peoples Congress in March; the new leadership has continued to defy expectations that it would enact a stimulus in order to send the messages that slow growth is good and should stay.

Slower growth rates themselves will not help rebalance the economy but they are a sign that the growth-centric incentive system may be changing. The latest NBS papers discussing the new “slow growth model” tells local government officials to “stop blindly pursuing investment growth at the expense of structural reforms” and to take a closer look at indicators related to “education, employment, income, housing, social welfare, health care, and the environment.”

The real question is whether changes in rhetoric regarding slow growth are only short term or whether they are really changing incentives for local government officials. Central government regulators have been relatively successful at incorporating energy intensity and pollution reduction targets into local government incentives. But much more fundamental reforms are needed to shift local governments away from investment GDP growth incentives. China is still far away from hitting the 12th five year plan target for raising the service sector share of output to 47 percent of GDP by 2015. Last year, the service sector was only 44.6 percent of GDP up only 1.4 percent from 2010.

And more fundamentally, the role of local governments in the economy needs to be changed. Premier Li Keqiang appears to be committed to reducing the government’s role in the economy both at the central and local level. In a speech on May 14th he said “local governments should not attempt to block the State Council’s objective of giving up certain project or administrative approval procedures to the market.”  It is still unclear whether Premier Li Keqiang will deliver on this rhetoric with further market reforms as outlined in the State Council’s working document on reforms in 2013. Convincing everyone to reduce their reliance on growth rates will help set the stage for introducing more market-based mechanisms for economic growth.