BEIJING — Economists are calling the Chinese government’s economic growth target for 2015 of “around 7 percent” predictable yet are raising questions over whether leaders have a clear plan for reforms needed to steer the world’s second largest economy away from its dependence on debt-fueled growth underpinned by wasteful construction projects, an overheated real estate market and bloated heavy industries, particularly in the iron and steel sectors.
Chinese Prime Minister Li Keqiang reealed this year’s GDP growth target on Thursday morning to thousands of delegates at the National People’s Congress, an annual legislative meeting where leaders outline policy goals for the coming year. In 2014, China’s leadership set a GDP target of around 7.5 percent, which, with GDP growth of 7.4 percent, it slightly missed.
This year’s goal of around 7 percent expansion is Beijing’s lowest economic growth target in more than 15 years.
“The economic goal is predictable,” Lu Ming, an economics professor at Shanghai’s Fudan and Jiaotong universities, said. “The Chinese economy has grown so fast for such a long time. There is no single economy in the world that can maintain that level of growth.”
China’s leadership has acknowledged this, particularly as debt has skyrocketed, mainly from local governments that have taken out billions of dollars in loans to fund wasteful construction projects as well as the growth of heavy industries that now face an overwhelming overcapacity problem – not to mention have caused unprecedented environmental degradation since Beijing infused its economy with a virtually unending supply of cash to fend off the 2008 global financial crisis via a nationwide infrastructure building binge.
“China’s economic development has entered a new normal,” Li said. “Our country is in a crucial period during which challenges need to be overcome and problems need to be resolved.”
The prime minister outlined additional goals, including the creation of 10 million new jobs, greater reforms for the country’s often-inefficient state-owned enterprises and the improvement of debt raising mechanisms for local governments. Not many specifics were offered on how such goals will be implemented.
Christopher Balding, an associate professor at Beijing University HSBC School of Business in Shenzhen, said he “does not give much stock to the government growth rate.”
“Whatever they announce is always in-line with expectations,” he said, adding he believes that Beijing is undertaking a strategy of easing the Chinese public into an era of growth that is substantially lower than the near double-digit expansion of nearly three decades.
Under the leadership of Xi Jinping, who came into power in 2012, officials are using catch phrases such as “new normal” while providing estimates rather than precise targets for economic growth as what analysts say is part of a strategy to prepare the Chinese public for an era of a less robust economy. The public’s support of the Communist Party has largely hinged on its ability to deliver a strong economy, and thus jobs, more prosperity and more prospects for ascent to middle class lifestyles.
“I don’t think the sky is falling, but I do think the slowdown is much more significant than is being reported,” Balding said.
“All indicators point to much, much slower growth. Electricity consumption is flat. Industrial production is essentially flat. Consumption is probably flat. You really aren’t seeing any indicators that there is this growth. I think there are a whole confluence of factors that are really putting stress on the overall economy,” he said.
In February, China’s manufacturing Purchasing Manager’s Index, or PMI, was 49.9. Numbers below 50 indicate contraction. Also last month, the country’s central bank cut its benchmark interest rates, the second such cut in three months. Economists say this interest rate cut does not reflect real interest rates, which are still actually quite high due to price deflation because of overcapacity in numerous industries, forcing manufacturers to sell products at a virtual loss to even just stay in business.
Li, in his speech in Beijing, set a consumer price inflation target of 3 percent, down from last year’s 3.5 percent target. Consumer price inflation hit a five year low in January.
“We need to ask why the economic growth rate is declining, but still the interests are going up?” Lu said.
Across sectors, manufacturers cannot afford interest rates on loans for new capital, cannot make margins on goods produced and are facing rising wages, among other challenges. In the manufacturing hub of Guangdong, a province in southern China, manufacturers are barely getting by or are being forced to shut down, Baldwin said.
He added: “I don’t think there is the political appetite for what really needs to be done. I don’t think they have a good recipe yet. I don’t see either a strong political will to take some of the necessary economic reforms, and I don’t know whether they even have the ideas to drive it forward.”
Beijing’s efforts to fend off the global financial crisis of 2008 created an entrenched system whereby local government officials have directly or indirectly profited from loans banks doled out to fund infrastructure projects. Under Xi, a vast anti-corruption campaign has been rolled out and is aimed at taking down officials who have profited off of the system. Yet Lu, the Shanghai professor, saoid local governments may still be reluctant to shut down unneeded manufacturing and cease wasteful construction projects because of ties to developers, potential job losses, which could lead to social unrest, or lack of alternatives to create new forms of economic growth.
“Local governments still want to use policy to support money-losing projects,” Lu said. “This is what we are worried about. Without higher economic growth, many local governments could go bankrupt.”
The professor said reform of China’s household registration, or hukou, system, could provide the most immediate economic benefits. Under the system, designed for population control in major cities, migrants from elsewhere are unable to have access to social benefits, schools and even universities if they do not have a household registration permit to live in a particular city. The result is that millions of migrant workers who flock to urban areas, like Beijing or Shanghai, tend to save money for an eventual move back home.
The central government has hinted of possible household registration reforms.
“If migrant workers have the option of staying in the places they are living now forever, they will consume more,” Lu said. “So urbanization is still very important for China.”