Since 2005, China’s central government has set a growth target of 8 percent, a reflection of a long-standing policy of “bao ba,” or, “protect the eight.” Eight, besides being a lucky number in China, is the government’s assumed minimum rate necessary to create adequate jobs and maintain social stability. This has been an easy target, with growth rates (according to the World Bank) easily exceeding 8 percent since 2000 (peaking at 14.2 percent in 2007).
However, this year, at the opening of the National People’s Congress on March 5, Premier Wen Jiabao’s annual work report deviated from this long-standing target with a new growth target of 7.5 percent. He called on China to focus on more sustainable development, including encouraging domestic consumption and managing inflation.
Stock markets in Hong Kong, South Korea, Australia and Shanghai fell on the news. International news outlets covered the announcement extensively, speculating on the meaning of the new growth figure. In mid-March, Wen defended the new target, commenting to the press that the 7.5 growth target was “not low.”
This shouldn’t have come as a surprise to the markets. In March 2011, the 12th Five Year Plan (covering 2010-2015), delivered by Wen at the Fourth Session of the Eleventh National People's Congress set a growth target of 7 percent over the next five years, and called for a “significant improvement in the quality and performance of economic growth.”
Additionally, this growth rate is still remarkable, even for China, and especially for other developed countries. By way of contrast, in 2011, the IMF estimated U.S. GDP growth at 1.5 percent.
The revised growth target is also simply acknowledging an inevitability. In the last quarter of 2011, China’s GDP growth rate was 8.9 percent, down from 9.2 percent for 2011 as a whole and 10.4 percent in 2010. There are expectations that China will continue to see slowing growth, as a result of a number of factors, including falling housing prices, less global demand from China’s exports, and the end of the demographic dividend. Additionally, much of the growth slowing can be attributed to central government policies intended to do just that, in order to manage inflation and prevent bubbles.
China is in desperate need of more sustainable and restrained growth, and the government’s willingness to dip below the 8 percent growth target is a signal that there will be more of an emphasis on the quality of growth, rather than the quantity. At the moment, China’s explosive growth has had significant consequences, including widespread environmental degradation, misallocated investment, and infrastructure failures (such as the Wenzhou train accident in July 2011). Bloomberg notes that the new growth target could mean that “leaders are determined to cut reliance on exports and capital spending in favor of consumption.”
Hopefully, this revised growth target will open the door to some economic restructuring.
The views expressed are the author's own.
