China Turns Cautious On Fast Economic Growth – Analysis

By Michael Lelyveld

China’s government is facing a tough challenge in managing expectations of high economic growth rates as the country recovers from the COVID-19 crisis this year.

On March 11, Premier Li Keqiang defended the government’s decision to set a relatively low bar for the economy after delivering his annual work report to the National People’s Congress (NPC) with a growth goal of “over 6 percent.”

At a press conference, Li pushed back at the notion that the government had deliberately low-balled the recovery from the pandemic following gross domestic product growth of 2.3 percent in 2020, the slowest rate in 44 years.

“A growth target of over 6 percent is not low considering the size of the Chinese economy, and the target is set to guide expectations to consolidate economic recovery foundation and pursue high-quality development,” state media quoted Li as saying.

While the official rates reported by the National Bureau of Statistics (NBS) are open to question, China is thought to be the only major economy to show any growth at all in 2020, with expansion taking hold only in the second half.

The government’s forecast for this year is unusual on several counts.

First, it is considerably lower than the International Monetary Fund’s revised outlook in January, which called for GDP growth of 8.1 percent. China’s official results for 2020 exceeded the IMF’s growth forecast of 1.9 percent last October.

The IMF is expected to update its forecasts at its spring meeting in the coming week.

In prior years. the government targets and IMF forecasts have routinely served as a floor for the GDP growth figures reported by the NBS, giving the Communist Party the opportunity to sing the praises of its centrally-planned economic policies.

High expectations, low confidence

Expectations for China’s economy this year have been flying high. In January, the World Bank pegged this year’s growth rate at 7.9 percent. Last month, Fitch Ratings Inc. raised its forecast from 8 percent to 8.4 percent, citing strong export growth and global demand.

But the government has kept its target at the lower level, raising questions about whether it has full confidence in the recovery.

It has also broken with tradition by deciding not to set any growth goal for the 2021-2025 period of the 14th Five- Year Plan.

At last year’s delayed NPC session in May, the government omitted a growth target for 2021, citing the uncertainty of the pandemic.

The absence of growth goals has left local governments without the customary guidance from central authorities on what the pace should be for 2022 and the rest of the five- year plan.

The IMF has forecast 5.6-percent growth for 2022, suggesting that expansion will slow after this year’s rate is magnified by the base effect of the 2020 slump.

In their reports of recent economic data, the NBS and state media have gone out of their way to include comparisons not only to year-earlier performance but also to pre-pandemic results from 2019, helping to avoid the implication that the recovery would lead to runaway growth.

In reporting results for the January-February period, for example, the official Xinhua news agency said that retail sales of consumer goods jumped 33.8 percent from a year earlier to over 6.97 trillion yuan (U.S. $1.07 trillion).

But Xinhua added that the figure rose only 6.4 percent over the comparable 2019 period, producing an average annual growth rate of only 3.2 percent over two years.

Relic of central planning

Economists have been urging China to abandon the charade of announcing annual GDP growth goals for well over a decade.

But the gaps in this relic of central planning may now leave the direction of policy adrift.

The departures from traditional target-setting are a reflection of the continuing uncertainties of the economic damage caused by the COVID crisis, raising questions about how long the economy will need to recover from its recovery.

The official target for this year and the IMF forecast for 2022 may be taken as signs that China will return to its pre- pandemic course of gradually declining growth rates in time.

Li’s explanations have tried to dispel the notion that the government has deliberately set the bar low so that it can jump over it more easily.

This year’s goal is “not set in stone” and actual growth may be faster, said Li, according to Xinhua.

Li acknowledged that the economy is growing from an “incomparable base” of the 2020 plunge, while the pace of global recovery remains to be seen.

Li also voiced caution about preventing “wild swings in economic performance” and efforts to keep expectations “stable.”

“A growth too fast will not be a steady one. You need a steady pace to sustain China’s development for the long run,” he said.

In a video address to the China Development Forum on March 22, Li repeated his insistence that the growth goal was “not low,” suggesting that the target has been the subject of continuing controversy.

In apparent support for the government’s position, a report by China Economist, published by the Chinese Academy of Social Sciences, forecast that first-quarter growth would reach 8 percent, but would settle back to “about 6 percent” for the year.

Industrial interests that habitually push for faster growth policies may be able to point to the IMF and other high growth forecasts to argue that Li’s goals are too restrained.

‘They don’t care about the IMF’

Derek Scissors, an Asia economist and resident scholar at the American Enterprise Institute in Washington, said the government is trying to head off another bout of binge borrowing to finance excessive growth, and is not concerned about coming up short of the IMF forecast.

“They’re not anticipating anything seriously negative, and they don’t care about the IMF,” Scissors said by e-mail.

“They want to check risk in the financial system — not necessarily reduce it, but limit it. Six percent instead of 8 percent is to discourage expansive provincial borrowing,” he said.

The government is anxious to avoid the frenzy of previous growth spurts, when annual targets announced by the central government served as a go-signal for provincial and local officials to overshoot with double-digit production and infrastructure projects aimed at advancing their careers.

Signs of concern have already started to show in the banking sector as yuan-denominated loans in February jumped nearly 50 percent from a year earlier to 1.36 trillion yuan (U.S. $208.6 billion), Xinhua said.

The government is also likely to be wary of touching off another energy and environmental splurge at a time of limited domestic resources, rising concern about import dependence and pressure over climate change policy.

During the past winter months, much of the country struggled with electricity shortages, higher coal costs, fluctuating natural gas prices and air quality problems.

The government also faces pressure over President Xi Jinping’s deadlines for reaching a peak in carbon emissions before 2030 and achieving “net-zero” carbon neutrality before 2060.

“It will be like walking a tightrope to balance emission reductions with ever-increasing demand for energy,” said a report last month by Caixin Global.

 “We need to seek a balance between, growth, income and employment, and we cannot pursue economic growth based on high energy consumption and heavy pollution,” Li said in his remarks to the development forum on March 22.