The World Bank is renewing calls for China to abandon the hard targets that have for decades governed its growth, as a slowing economy intensifies the need for the country to pursue reform over numerical goals.
A fixation on government GDP forecasts has long distorted China's economic structure, prompting officials to bend rules and pour out money to ensure their year-end performance exactly match expectations. But those practices are growing increasingly risky for China as it faces a comedown from the high-flying decades it has just experienced, bank economists said on Wednesday as they delivered their second China economic update of the year.
The "growth slowdown we are currently experiencing is not temporary but structural in nature," said senior economist Karlis Smits. He warned that "China's next transformation toward a more efficient, equitable and sustainable growth will depend on how successfully these structural reforms" – to labour and capital markets, in particular – "are made."
Earlier this month, the World Bank pared 2014 growth expectations to 7.4 per cent from 7.6 per cent, falling below the 7.5 per cent target China has set. The bank also suggested 7 per cent would be a reasonable range for coming years. But, it warned, such targets should be indicative, and not used to govern growth. To do otherwise would be to interfere with the more important work of shifting from an investment-driven economy – much of it led by government spending – to one more dependent on services and the private sector, they said.
China must "intensify policy efforts to place the economy on a more sustainable path," said Chorching Goh, lead economist for China.
She added: "implementation of a co-ordinated and ambitious agenda will not be easy. However, if done well a moderation of growth over the next decade is expected and welcome."
That will require fundamental change for a country that has fallen from the headiest days of double-digit growth, and now faces a raft of problems. Those include weeding out inefficiency, combatting pollution and building new ways to compete on the world stage as its own labour grows too expensive for it to continue as the world's factory based on price alone.
Though it has been propelled by a hard-charging entrepreneurial class, China's continued use of growth targets reveal the extent to which it remains a planned economy. China has not missed its annual expectations since 1998, in the aftermath of the Asian financial crisis.
The use of a GDP target, then, carries an important symbolic role: it is a yardstick for the adjustments Chinese leadership is willing to countenance in its bid to rebalance its economy.
Signs have emerged that such a rethink is under way.
After China posted third-quarter growth of 7.3 per cent, comparatively distant from the 7.5 per cent annual target, finance minister Luo Jiwei responded with a shoulder shrug.
That performance was "not really out of our expectations because the government's set target is around 7.5 per cent," he said. The emphasis was on the word "around."
"We are no longer in a planned economy," Mr. Luo argued. He called the GDP target "an anticipation, it is a kind of estimate or forecast."
There are other signs, too, of change. Plunging steel demand, and a lack of government intervention to prop up steel makers, suggests an increasing willingness to allow trouble to fall on industries that have resisted calls for consolidation and innovation. Though China has launched a series of mini stimulus plans this year, it has not responded to the slowdown with a massive spending package.
Even the real estate market, among China's most sensitive since its well-being is among the chief markers of well-being for many, is showing signs of change.
This year, the World Bank dug deep into Chinese statistics to analyze the relative rates of growth among 250 cities. It found that "in the cities where you have the highest population growth, the housing starts tend to be higher. And this was not the case in the past five years," said Mr. Smits. That suggests greater market discipline in a nation whose countryside is populated by small forests of uninhabited apartment towers.
There are still numerous problems: real estate investment continues to be strong, even as property prices are falling, suggesting economic mismatches. Government debt continues to expand, and an outsized proportion of growth remains driven by state spending.
Still, some of those numbers are trending in new directions – the expansion rate of government debt is slowing, and the services sector is becoming a greater contributor to overall GDP growth. Even as it called for Chinese leadership to do more, the World Bank paused for a compliment.
"The challenge is to engineer a gradual slowdown," Ms. Goh said. But, she added, "the government has done a good job."