By Michael Lelyveld
As President Xi Jinping tightens his grip on political power, the question for China’s economy is whether the government will stick to its pledges of more sustainable growth.
Officials have been promising for years to steer China away from the path of high gross domestic product growth, fueled by huge loans and high-polluting industries.
“I don’t think China will be able to sustain a super-high or ultra-high speed of growth, and that is not what we want,” Xi said in April 2013, shortly after taking his presidential post.
“China’s model of development is not sustainable, so it is imperative for us to speed up the transformation of the growth model,” he said in remarks then reported by the Financial Times.
The economic promises of Xi and Premier Li Keqiang followed those of former Premier Wen Jiabao under the presidency of Xi’s predecessor, Hu Jintao. Wen warned that high growth rates were “unsustainable” as he lowered the GDP target for 2012 to 7.5 percent, setting a goal below 8 percent for the first time in seven years.
Since then, the government’s targets have gradually receded, settling down gently from “about 7.5 percent” in 2013 and 2014, to “about 7 percent in 2015,” then to 6.5-7.0 percent in 2016 and “around 6.5 percent” this year.
Making room for further adjustments in 2015, the government said in its 13th Five-Year Plan starting in 2016 that annual growth should average around 6.5 percent through 2020 and be at least 6.53 percent to achieve the Communist Party of China’s (CPC’s) task of doubling GDP in a decade and creating a “moderately prosperous society.”
In most years, the annual targets have been seen as an effective minimum for official GDP, falling short only in 2014 and 2015 with growth rates of 7.3 percent a 6.9 percent respectively.
But the gradually diminishing benchmarks have also served to mask more abrupt economic changes.
The drop from 9.3-percent growth in 2011 to 7.8 percent in 2012, for example, brought China to its lowest official growth rate since 1999. Some experts believe the economy came close to recession with real growth as low as 3 percent in 2015, although official targets and results portrayed only a modest decline.
Most recently, official GDP has topped the targets by a substantial margin as the government returned to the costly economic stimulus policies that it used to fend off the global recession in 2008.
Shift in growth model
The government has touted a shift in its economic growth model from investment to consumption with “supply-side” management and innovation as guiding principles. But GDP growth of 6.9 percent in this year’s first half has relied heavily on infrastructure projects, a building boom and excessive bank loans.
The spending splurge may have given the government room to pursue the more sustainable economic policies it has promised, once the political dust settles from the CPC 19th National Congress, which opens Wednesday.
In the days before the congress, CPC statements have addressed the issues in only the most general terms.
Over the past five years, China “saw major achievements in economic development and major breakthroughs in comprehensively deepening reform,” said a communique released over the weekend following the CPC 18th Central Committee’s Seventh Plenary Session.
“The ecologic environment has been remarkably improved,” it said.
Despite the claims, China’s reliance on credit-driven growth has created conflict with the International Monetary Fund over the risks of runaway debt, as well as a rating downgrade from Standard & Poor’s last month, and warnings about renewed clouds of winter smog.
In its updated World Economic Outlook last week, the IMF raised its near-term growth forecasts for China to 6.8 percent this year and 6.5 percent in 2018, adding 0.1 percentage points to earlier estimates for both periods.
But the fund suggested that greater growth is not necessarily a good thing.
“The upward revision to China’s growth forecasts reflects a slower rebalancing of activity toward services and consumption, a higher projected debt trajectory, and diminished fiscal space,” the IMF said.
“Unless the Chinese authorities counter the associated risks by accelerating their recently encouraging efforts to curb the expansion of credit, these factors imply a heightened probability of a sharp growth slowdown in China, with adverse international repercussions,” it said.
Unresolved economic conflicts
The government’s reform policies have done little to resolve the economic conflicts.
While it has pressed polluting industries like coal and steel to cut surplus production capacity, the combined result of the reductions on the one hand and stimulus on the other has been higher coal and steel prices, more production and smog.
The government has countered with new rules and restrictions on projects and emissions in the most polluted production centers and urban areas.
But the economic question is whether it will set substantially lower targets that will send a strong signal to local officials and industrial enterprises that sustainable growth policies will be enforced.
Scott Kennedy, deputy director of China studies at the Center for Strategic and International Studies in Washington, said that the overachievement of the average 6.5-percent target over the past two years will allow the government to meet its numerical goals over the next two years “if … growth lags a little.”
“My sense is that the leadership is now comfortable with modestly lower growth levels, somewhere between 5.8 percent and 6.2 percent in 2018-2020, because managing China’s financial risks has become a high priority,” Kennedy said by email.
“Debt levels are officially at 250 percent of GDP, but that is likely an understatement, and the complexity of debt has risen dramatically with much more generated outside the standard banking system,” he said.
That concern is likely to put a damper on more stimulus- driven growth.
“I don’t think China will essentially ignore growth targets, but they are likely to manage those targets in the context of limiting their financial risks,” said Kennedy.
The outlook suggests a delicate balancing act for the remainder of the Five-Year Plan following the pro-growth practices of the past two years.
In an analysis last month published by the official English-language China Daily, Oxford Analytics economist Louis Kuijs said the leadership is likely to stress many of the reform steps outlined in the landmark Third Plenum plan of the CPC’s 18th National Congress in 2013.
Tougher challenges ahead?
But tougher challenges related to heavily-indebted state-owned enterprises (SOEs) and deleveraging will be “more difficult,” Kuijs said.
The GDP growth target for 2018 will likely be “somewhat lower,” and leaders may accept growth “somewhat below 6.5 percent,” said Kuijs.
“Reining in credit growth more forcefully, so that leverage peaks in a few years, would probably result in GDP growth of 5 to 5.5 percent,” he said.
That could put China on a more sustainable path while meeting many of its socioeconomic objectives. “But it seems unlikely that the leadership will agree to that,” Kuijs said.
The reluctance to set substantially lower targets may do little to restrain the political impulse to overachieve and claim credit for party policies, pushing growth beyond the sustainable range.
In the run-up to the party congress, state media have claimed an advantage for centralized policy-making and given short shrift to the conflicts underlying China’s economic growth.
“While many western countries continue to stagnate, China has grown and kept stable,” Xinhua said in a pre-congress commentary on Sept. 28.
“This is due to the strong leadership of the Communist Party of China, which is markedly different from the western system where multiple parties hold office in turn, often bickering on their way to power,” the official news agency said.
Xinhua said that “the West should attempt to decode the mystery of China’s economic miracle as it can offer an insight to the future of China and the world.”
To underscore the point, Xinhua repeated the comparison to Western democracies in a commentary on Sunday.
Such claims of political superiority for China’s economic performance may make it harder to turn away from unsustainable growth policies.
Conversely, CPC political strength may be tested if it follows the path of substantially lower and more sustainable growth rates.