Goals can help focus the mind, and help define success. What’s good for individuals isn’t necessarily good for countries, though. That’s something China needs to learn before it’s too late.
China’s growth targets are a recurring obsession with the country’s government – and, by extension, with the rest of the world. Chinese President Xi Jinping made international headlines in late October when he announced an annual economic growth target of 6.5% over the next five years. That goal is part of China’s bigger aim of doubling total economic output between 2010 and 2020.
How much is 6.5% growth in China? It’s the lowest growth rate China’s economy has seen in decades. Still, it’s like adding two economies the size of Singapore’s over just twelve months. Or half a Thailand. Or eight Cambodias.
Official economic growth rates, measured using Gross Domestic Product, or GDP, have been central to Chinese policymaking for a long time. Beginning with Mao Zedong in 1953, China’s five-year plans have outlined economic goals and production targets. More than just forecasts, these were the ultimate measure of performance. The careers of millions of local and regional government officials were made, or broken, based on whether they could deliver on specific targets set by a government bureaucrat.
This approach to economic growth helped destroy the Soviet Union. Once a pillar of the global economy, the Soviet Union was obsessed with production – of wheat, shoes, nuclear missiles, bricks, medicine, anything. The more, the better. And anyone who didn’t produce more (or who didn’t at least say they produced more) was in trouble.
In the Soviet Union, production became an objective in itself. The cost of that production – and whether making more and more stuff served any bigger purpose – was ignored. It didn’t matter if another slab of steel cost more to make than what the steel was actually worth… what mattered was that there was another slab of steel to be counted.
China isn’t anything like the Soviet Union except for two things – its communist government and its cult of economic growth (which is another name for production.)
One consequence of the Chinese government’s focus on growth is that from 2008 to 2014, public debt (which is the borrowing by all levels of government) as a share of GDP increased from 121% to 208%. Debt grew a lot faster than the economy as a whole. That debt went into building more apartment blocks, more roads, more copper smelters, more of anything that could be labelled “growth”. China has to provide jobs for the tens of millions of people who enter the work force every year – and this is a quick and easy way to do it.
But for every yuan invested in growth, the return on investment, that is, the impact from that extra yuan of debt, declined. One Chinese government report last year estimated China made $6.8 trillion in wasted investments since 2009. That’s bigger than the size of the entire economy of Japan.
Also, growth in productivity has been slow. You’re productive if you make more for each unit of input (like an hour of work, or a yuan of investment). China’s productivity growth has been low.
China’s debt levels could continue to rise, to fuel further growth. But, sooner or later, someone has to pay back those loans. Or else banks that lent those funds will go bust, companies will default on bonds, and suddenly China – along with the rest of the world economy – will be facing much bigger problems.
So, the best thing that could happen for the world economy would be for China to announce it’s no longer going to have growth targets. After all, no other country makes as big a deal about what it’s aiming for. By releasing its economy – and its bureaucrats – from the need to achieve a certain level of growth this year, money could be invested in a much smarter way. Or, even better, money could be put towards paying back debt.
So the day that Xi Jinping says, “China is no longer going to focus on growth targets for its economy,” will be the start of a new era for China. And a good reason to buy Chinese stocks, since a big cause for concern over the future of China will vanish.
