Chinese GDP Obsession

EDIT 1/24/2021

I was right. So far, 7 provinces representing a third of Chinese GDP have released GDP targets for 2021. Link.

On December 28th, Macropolo’s Damien Ma and Houze Song wrote – link – that China is “closing the curtain on the GDP obsession era.” Damien, the co-founder and director of Macropolo, runs an excellent think tank, but it is incredibly presumptuous to say that China’s GDP obsession is over.

In 2020, China published its 14th Five Year Plan. In this plan there was no mention of GDP targets. Instead, China was to focus on “getting one’s own house in order (办好自己的事). ” Macropolo’s point is that by not explicitly giving the country GDP targets, Chairman Xi is signaling “changing political incentives.”

[Not publishing GDP targets] is tantamount to simultaneously reshaping political incentives, changing the investment-driven model, and redirecting focus toward de-risking and reforming the economy.

-Damien Ma, Nov 2020

Macropolo is right to signal that this is great change in Chinese policy. For years, Beijing has told provinces what level of GDP to achieve, causing local governments to direct that amount of money into infrastructure. By not giving a growth target, “the Central Committee decided that importance should be placed on structural adjustment, quality, and efficiency. ”

However, changing language regarding growth should not be mistaken for actual, structural change. From the World Bank’s most recent China Economic Update (emphasis mine):

Even as GDP returns to its pre-pandemic level by 2021, the COVID-19 shock has accentuated pre-existing imbalances and highlighted structural challenges. The pandemic and ensuing recovery have caused imbalances in the structure of aggregate demand to relapse, as households increased savings, government support stressed investment, and external imbalances widened. Public and private debt stocks—already high before the pandemic—have increased further. The vulnerabilities in fiscal, corporate, and banking sector balance sheets together with rising debt service costs will weigh on China’s growth, following next year’s strong cyclical rebound.

-World Bank December 2020 China Economic Update

The World Bank goes on to say they expect China to grow at roughly 8% next year. How is it that China could grow so much while focusing on quality and efficiency? The Chinese government is still effectively directing GDP. There might not be a national, explicit target, but funds are being directed through state owned enterprises, provincial govnermnets, local governments, and Local Government Financing Vehicles (LGFVs):

  • Chinese fixed asset investment in transportation will be an eye popping 2.4 trillion RMB in 2021.
  • China has long said – and continues to say – that domestic consumption is top priority, but China has yet to signal any policy to redistribute wealth.
  • Chinese local governments are actively evading restrictions on debt limits. According to public records, the total assets of 960 large LGFVs that regularly disclose financial results rose 40 per cent over the past four years. Their revenues and net income, however, increased just 6 per cent and 4 per cent respectively.

I don’t disagree with Macropolo’s take that China is changing its political incentives. I do find it presumptuous to say that China is abandoning GDP targets when more than 2% of GDP is being directed into transportation infrastructure and no policy to redistribute wealth has been verbalized. In general, I take little stock in the wording of five year plans; the 13th Five Year Plan said almost the same thing, and implementation of economic re-balancing policy completely failed. Why should this time be different? Personally, I’ll believe it when Chinese GDP rises less than 5%, Chinese households increase their share of GDP (wealth redistribution from the state to households), fixed asset investment plummets, and LGFV debt is under control.

In China, nothing is tantamount to simultaneously reshaping political incentives, changing the investment-driven model, and redirecting focus toward de-risking and reforming the economy. Its been tried for decades. For a good read on this, I highly recommend this Caixin article. In short, don’t take Chairman Xi’s word for it; seek truth in actions.