China has abandoned the illusion that high growth can be maintained indefinitely. That’s the right way forward

China’s slowing GDP is a reflection of a new policy approach after years of a growth-first mindset
It will continue to reap the benefits of the shift to focus on job creation, which is more conducive to the implementation of structural reforms and the adoption of new technologies

Prof Zhang Jun

Published: 9:30pm, 16 Apr 2023

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After Chinese GDP grew by only 3 per cent in 2022, one would have expected the government to set a growth target of at least 6 per cent for this year. In fact, virtually no market forecast projects a lower rate. Yet, at last month’s National People’s Congress, outgoing premier Li Keqiang revealed in his final government work report that Beijing was aiming for growth of about 5 per cent, the lowest target of his tenure.

Under former premier Wen Jiabao, from 2003 to 2013, China maintained an official growth target of 8 per cent. But in his final government work report, Wen lowered the target for the first time, by 0.5 percentage points. The reason was obvious: Wen wanted to help cool the then-overheated economy. Surprisingly, Wen’s successor Li effectively treated 7.5 per cent as a ceiling for growth during his 10-year term.

In fact, since 2014, Li consistently revised China’s growth target half a point downwards from the previous year’s target, whether through a categorical adjustment or the introduction of a lower range. With GDP growth repeatedly falling short of the official target, one cannot help but assume this was a response to the economy’s actual performance. If existing targets are not being met, why would the government raise them?

In the past three decades, growth targets have, to some extent, become a self-fulfilling prophecy. From 1993 to 2013, the central government’s growth target was practically interpreted as an indication of what it hoped for. That’s why the actual rate of growth was much higher than the government targets.

Yes, there were structural forces working in China’s favour. Local governments faced political incentives to implement their growth strategies – including fixed-asset investment and industrial planning – to meet Beijing’s priorities and expectations.

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Just as rising growth targets encourage local governments to pursue growth more aggressively, falling targets can discourage such efforts, leading to lower growth rates that in turn spur the government to reduce targets further, causing a downward spiral. This makes it difficult to estimate China’s potential rate of growth, which is supposed to be what anchors economic policy. Why did that happen?

China’s slowing GDP growth in the past decade is a reflection not of flawed policy but of a new approach. From 1993 to 2013, GDP growth was the central government’s primary objective and guided policymakers’ approach to macroeconomic management. This objective – which local governments were tasked with realising – led to the acceleration of public capital formation, improvements in the investment environment, the crowding in of private capital and the creation of more productive capacity.

This approach also has its limits, resulting from rapidly increasing marginal costs. While productive investment fuels growth and development, excessive investment leads to diminishing returns and rising debts. The growth-first approach also caused considerable environmental damage.

The immediate social costs associated with this approach finally pushed China’s government to opt for a new strategy, centred on creating jobs and ensuring macroeconomic stability. On the employment front, China has already achieved considerable success. In the past decade, urban job creation has stood at around 12 million or more annually, far exceeding the target – more binding than the GDP target – of 11 million.

China owes these gains largely to rapid progress in hi-tech sectors such as the platform economy and electric vehicles. New digital technologies have supported rapid growth in the service sector and bolstered resilience in the labour market more broadly.

If the economy can produce enough jobs, ever-accelerating GDP growth is simply not necessary. Even as GDP growth has plummeted to about half the annual average of 10.2 per cent in 2002-12, China has not experienced significant social unrest. Neither has there been a financial crisis or a sharp economic contraction that reverses past progress on living standards, despite the pandemic-induced slump.

China will continue to reap the benefits of its shift from growth-centric policymaking to a focus on jobs. This approach is more conducive to the implementation of structural reforms needed to limit excess investment and reduce debts.

It should also spur the adoption of new technologies, generating a virtuous cycle of job creation and productivity growth. Progress in these areas – as well as the convergence of productivity growth rates across regions – is crucial for the economy’s medium- to long-term development.

An unfavourable external environment further strengthens the case for China to look beyond growth. The entire global economy is grappling with declining productivity growth and falling demand – trends that will not be reversed any time soon.

Moreover, we are witnessing the collapse of the institutional framework that has underpinned capital-account liberalisation worldwide in the past 30 years. More broadly, geopolitics-driven economic policies are generating considerable uncertainty in global supply chains and financial markets.

The era of high growth and low inflation is over in the advanced economies and is being succeeded by the “secular stagnation” of which former US Treasury Secretary Lawrence H. Summers has long warned. In this context, emerging-market economies such as China are right to abandon the illusion that high growth can be maintained indefinitely. The more likely scenario is a long period of slower growth.

China is better off focusing on employment and working to avoid a systemic financial or debt crisis than attempting to resist the inevitable.

Zhang Jun, dean of the School of Economics at Fudan University, is director of the China Centre for Economic Studies, a Shanghai-based think tank. Copyright: Project Syndicate