With analysts divided on China’s economic potential, Beijing should seek as high a growth rate as possible amid reforms
- When setting growth targets, a too-conservative estimate could have serious consequences for China’s economy and its people
- Beijing should therefore seek as much expansion as possible, focusing in particular on infrastructure investment, while making the necessary structural changes
Most Chinese economists seem quite comfortable with this targeted range. One explanation is that China’s potential growth rate is 6-6.5 per cent, and a target should be set accordingly. Another is that a lower growth rate would give the economy more room for structural adjustment.
This may be true – everyone in China agrees that 9-10 per cent annual growth rates are a thing of the past – but there is no clear indication of how much China’s growth potential has actually declined. Long-term supply-side structural factors do not explain, for example, why the growth rate fell from 12.1 per cent in the first quarter of 2010 to 7.4 per cent in the third quarter of 2013.
Not only are there missing links on the causality chain between long-term structural factors and actual economic performance; it is unclear how long those factors would take to constrain GDP growth to a particular level. In fact, 20 years ago, the same long-term factors were used to warn of a possible fall in Chinese GDP growth.
Because of the complexity of China’s growth trajectory, many economists seem to base their assessments of potential on performance. After every drop in China’s GDP growth since the second quarter of 2012 – when growth fell below 8 per cent – economists have emerged to declare that performance was in line with potential.
To be sure, there are various estimates of China’s potential growth rate, ranging from 5 per cent to 8 per cent. But it is difficult to determine which is reliable. For one thing, there is reason to believe that most estimates fail to discount cyclical factors adequately when calculating the long-term trend.
The danger here lies in the fact that excessively low growth targets, based on excessively low estimates of potential growth, lead to lower actual growth. For an economy the size of China’s, a difference of even 1 percentage point has a huge impact on welfare.
Many economists would counter that a conservative growth target is useful – or even necessary – to create space for structural adjustment. But this claim is unconvincing. Reducing China’s excessive reliance on real-estate investment – one of the economy’s most serious structural problems – does not necessarily require a reduction in fixed-asset investment growth, let alone GDP growth. Nor is slower GDP growth a prerequisite for improving financial stability.
In my view, because no one is sure what exactly China’s potential growth rate is, the best strategy is to try to achieve as high a growth rate as possible, so long as it doesn’t worsen inflation and hinder structural adjustment.
Fiscal and monetary expansion may be out of fashion among China’s mainstream economists, who insist that structural adjustment must be the priority. But it could go a long way toward bolstering China’s economic performance in 2019, without impeding structural reform. The challenge is to strike the right balance.
Yu Yongding, a former president of the China Society of World Economics and director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, served on the Monetary Policy Committee of the People’s Bank of China from 2004 to 2006. Copyright: Project Syndicate