Reform and China's GDP Target

Now that China has announced sweeping plans for reform, its time to start implementing them. And an annual Central Economic Work Conference, expected in Beijing next week, is likely to provide some sense of how quickly that will happen.

As in previous conferences, top party members, provincial officials, and ministers will likely meet in a closed-door session lasting three days. This year the focus will be fleshing out policies to accompany the economic reform goals agreed to at last month’s third plenum.

Those include further freeing up of interest rates, putting in place a deposit insurance scheme, and the creation of smaller private banks. Liberalizing hukou (or household registration), giving farmers more rights to their land, and rolling out a more complete social welfare net are also likely to be discussed.

The meeting may well consider what target to set for GDP growth next year. While the number may not be formally announced until next March’s National People’s Congress, it could be leaked after the conference closes, as was the case in Dec. 2012.

The GDP target will provide an important signal on how serious the party is about pushing reform. It could be set at 7.5 percent growth for 2014, as it was for the past two years (the previous eight years it was always 8 percent). Or more encouragingly for reform advocates, it could be cut to 7 percent.

Sticking with 7.5 percent would suggest a lack of resolve on reform and an unwillingness to fully abandon China’s unsustainable reliance on investment-driven growth. Liberalizing bank deposit rates, expanding medical, education, and pension coverage for farmers and migrant workers, strengthening land rights, and forcing state enterprises to pay higher dividends will all initially hurt corporate, banking, and local government balance sheets.

So while the planned reforms should eventually unleash new drivers of growth, including more spending by rural Chinese and more investment by private companies, they are likely in the shorter term to have limited impact. Most economists in a recent Bloomberg survey see the policies boosting growth this decade by less than 0.5 percent a year.

Although China’s top officials have repeatedly said that the economy must slow as it reforms, they have also suggested that there are limits on how much deceleration is acceptable. The main reason: jobs. Speaking to representatives of the official labor union in Beijing on Oct. 21, Premier Li Keqiang said that China needs economic growth of at least 7.2 percent to ensure adequate employment.

While saying that the consensus forecast among economists now is that the target will remain unchanged, Capital Economics analysts in London disagree.

“We expect the target to be lowered to 7.0 percent so that policymakers have more breathing room to focus on structural reforms rather than next quarter’s GDP figures,” write Capital Economics economists Mark Williams and Qinwei Wang in a Dec. 5 research note. “Efforts to meet a 7.5 percent target would probably lead to faster credit and investment growth, and thereby deepen China’s structural problems.”

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