China’s New GDP Range Target Is A Balancing Act by Dan Steinbock, Difference Group
China’s new growth target of 6.5-7% will ensure more flexibility amid deceleration at home and stagnation in the West. It is a balancing act between reforms and deleveraging.
Last Thursday marked the opening of China’s annual “Two Sessions,” or the annual plenary meetings of the mainland’s top legislative and consultative bodies. These meetings offer an opportunity to observe China’s economic and political trends, including the 13th five-year plan, poverty alleviation and charity law, supply-side reform and reform of the judicial system, the One Belt One Road initiative, green development, and the anti-corruption struggle.
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Yet, public spotlight remains on China’s new range target of 6.5-7 percent for 2016. Typically, it has given rise to two misguided interpretations. One focuses on China’s domestic economy, another on China’s role in the world economy.
China – Greater flexibility domestically
The first misreading implies that the new range target is the direct result of China’s economic slowdown. In reality, the range target is not unique. It was used in 1995 and, in the past two years, growth targets have been preceded with the word “about.” In other words, since the global crisis of 2008-9, the growth target has been regarded more as a flexible guideline.
In 2015, China’s economy grew by 6.9 percent. Internationally, the performance was portrayed as the “slowest in 25 years.” And yet – as I have shown before – the deceleration signals the eclipse of the mainland’s industrialization. China’s slower growth is consistent with its post-industrial era.
In the past few years, Prime Minister Li has pushed structural reforms to support a medium-term rebalancing toward consumption and innovation. He has shunned another huge stimulus, which would contribute to government debt, favoring targeted fiscal measures. Finally, he has promoted gradual deleveraging to reduce local government debt, which accumulated after the 2009 stimulus.
The new range target does not undermine these priorities. On the contrary, it ensures greater flexibility in implementation – and that’s vital amid increasing international uncertainty.
Greater resilience globally
The second misreading implies that China’s growth deceleration is the primary cause of diminished global growth prospects. In this view, since China played critical role fueling global growth after the 2008-9 crisis, the current global slowdown should be attributed to China as well. Moreover, the addition of $72 billion to budget deficit is seen as further evidence of China’s debt escalation.
Yet, in relative terms, that addition means a deficit of 3 percent of the GDP, instead of 2.4 percent in 2015. In relative terms, it matches the decrease in China’s defense expenditures, which will to decrease to 7.6 percent of GDP from 10.1 percent in 2015. If anything, these budget items simply reflect China’s balancing act between economic growth and pushing ahead with reforms.
What about China’s role in the diminished global growth prospects? After the global crisis, the mainland did account for half of the global GDP growth, thanks to its huge stimulus. The contribution spared international economy from a global depression. Well, today, China’s economy is almost 15 percent of the world GDP, but its growth continues to account for some 25 percent of global GDP growth. In contrast, the major advanced economies – the US, Europe and Japan – barely achieve 0.5-2 percent growth. However, they still account for more than 52 percent of the world GDP – more than twice as much as China.
Under these circumstances, the argument that China’s growth deceleration fuels global uncertainty is flawed. While growth is decelerating in emerging economies, it has virtually halted in major advanced economies, despite more debt-taking.
Global risks in advanced economies
According to the credit rating agency S&P, global sovereign borrowing will soar to $6.7 trillion in 2016. The US, Europe’s core economies and Japan account for more than 72 percent all commercial borrowing across the world. In view of population and economy, the role of the US (34%) and particularly Japan (24%) is grossly disproportionate.
In contrast, the role of the BRICS – China, India, Brazil and Russia– is less than 13 percent of the total. While China’s share of borrowing (5.1%) is significant, it is about a seventh of that of the US. Moreover, in the coming decade, China has potential to grow 2-3 times faster than major advanced economies, as long as market-oriented structural reforms prevail.
In view of the global economy, the real risk remains in major advanced economies – not just in emerging economies.
The author is the founder of Difference Group and has served as research director at the India, China and America Institute (USA) and visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Centre (Singapore). For more, see www.differencegroup.net