Why China Needs Such Rapid GDP Growth: More Jobs

As China frets about meeting its target of about 7.5 percent growth in 2014, it’s time for more stimulus. The State Council, China’s cabinet, announced plans this week to further expand railways across the country, renovate dilapidated urban housing, and provide new tax breaks for small businesses. Many analysts are expecting a return to looser credit policies this year as well.

But what China considers unacceptable levels of gross domestic product growth would be the envy of most other countries. So why do China’s leaders demand such rapid rates of economic expansion?

A clue to that is found in Premier Li Keqiang’s recent work report, China’s version of a state of the union speech. Creating enough jobs—mentioned 11 times in the document released on March 5—is what drives Chinese officials’ obsession with fast-rising GDP.

China needs high levels of growth—at least 7 percent, says Li—to ensure enough jobs for 7.2 million college grads and 10 million people flooding cities from the countryside every year. China’s leaders have set a target of producing at least 10 million jobs this year, and a record-high 13.1 million urban jobs were added last year. “Employment is the basis of people’s well-being,” Li said in the work report. “We will steadfastly implement the strategy of giving top priority to employment.”

The trouble is, new stimulus mainly means more investment-driven expansion, which already accounts for about half of the economy. That’s problematic given industrial overcapacity and soaring debt levels held by local governments and companies. And while it indeed boosts the headline GDP number, it doesn’t always create lots of jobs. Heavy industries such as steel, aluminum, and real estate construction, which have rapidly expanded particularly in the years following China’s 2009 stimulus, tend to be capital-intensive rather than labor-intensive.

The country has struggled in recent years to substantially boost the portion of its economy driven by consumption and the job-creating service sector. The plan to cut taxes may provide some support toward that goal. Unfortunately, more train tracks and urban housing may instead set China back.

Before it's here, it's on the Bloomberg Terminal.