Learning to slow down
By the time a government releases gross domestic product numbers, they’re ancient history. That proved true again today, after China announced its economy had expanded 7.3 percent in the fourth quarter, making 2014 growth the slowest since 1990. Within hours, attention had moved on to another figure released today: 6.8 percent.
That’s the International Monetary Fund’s lowered forecast for Chinese growth this year. The number quickly had analysts buzzing about additional stimulus from Beijing - on top of a recent $1.1 trillion package - in order to maintain growth around 7.5 percent (it was 7.4 percent in 2014). That’s the last thing China needs if it’s to recalibrate the economy away from excessive investment and debt.
Fortunately, buried within today’s GDP numbers are others that suggest Chinese leaders should be able to withstand the slowdown the IMF is predicting. Most importantly, China’s Gini coefficient, a measure of a nation’s rich-poor gap, dropped for the sixth straight year - a telltale sign that the benefits of growth are spreading more widely. At 0.469 in 2014, China’s reading is still in the range that University of Michigan researchers consider “severe,” putting the country at risk of social instability. What’s important, though, is that we now have a convincing track record of progress.
At the same time, China’s average disposable income outpaced GDP last year, rising 8 percent to about $3,245. The country created 10.7 million new jobs in 2014, with unemployment at a reasonable 5.1 percent. Both figures are critical: As long as Beijing keeps income and employment levels up, leaders should have the political leeway to carry out some of the more painful, growth-dampening reforms they avoided in 2014.
As I wrote yesterday, officials should leave it to the People’s Bank of China to cushion the blow, rather than injecting more fiscal stimulus. Even after the central bank’s November rate cut, monetary conditions remain taut. In December, they were the tightest in 10 years, according to Bloomberg’s monetary conditions index. That gives People’s Bank of China Gov. Zhou Xiaochuan considerable latitude to fine-tune the economy as growth slows. For now, as Bloomberg’s Beijing-based economist Tom Orlik points out, healthy trends in GDP and industrial output (up 7.9 percent in December year-over-year) mean Zhou can wait a month or two before he eases credit again.
The good numbers, however, don’t change one thing: China needs to stop setting annual growth targets. While it missed 2014’s by just a tenth of a percentage point, these arbitrary goals distract Beijing and encourage bad behavior. As markets and pundits obsess over every missed GDP forecast, authorities feel pressure to make their annual numbers. Also, local officials from Chengdu to Nanjing are incentivized to overshoot on local GDP in order to keep their masters in Beijing happy. That adds to a public debt-to-GDP ratio that’s already a worrisome 251 percent and keeps inefficient smokestack industries alive.
“China need not grow as fast as it did to maintain high employment, which is Beijing’s chief concern, and it cannot grow as fast as it did, if the environment is to improve,” writes Simon Cox in Foreign Policy.
Any serious effort to reduce the role of state-run enterprises, rein in shadow-bank lending and shift growth drivers away from exports will dent GDP. Fear of social unrest has understandably made Chinese leaders reluctant to push too hard on any of those fronts. Now that there’s evidence ordinary Chinese can withstand lower growth, Xi should have the courage to make even the IMF’s estimates look optimistic.
*The author is a Bloomberg View columnist based in Tokyo and writes on economics, markets and politics throughout the Asia-Pacific region.
by William Pesek