Beijing’s 8 per cent growth targets may make political sense, but the economic argument is flimsy
Xu Sitao 19 March 2009
As expected, Chinese leaders reaffirmed their commitment to achieve 8 per cent gross domestic product growth in 2009 during the annual National People’s Congress session this month. Why did they do that? Rightly or wrongly, most Chinese policymakers adhere to the 8 per cent figure as the minimum growth threshold to create enough jobs for the country’s enormous population. But this is a myth. There is no empirical evidence to suggest that if growth fell below 8 per cent, unemployment would rocket, sparking social unrest.
Still, it is worth asking whether Beijing can achieve 8 per cent growth this year. Let’s begin with the Economist Intelligence Unit’s baseline scenario. We believe that the world economy this year will be in a deep recession, but not a depression. A corollary to this is that protectionism will rise and cause more trade frictions but not a full-blown trade war. This is a good start.
For the mainland to reach the 8 per cent target for all of 2009, it must grow by more than that towards the latter part of the year. That is because the economy’s downward momentum since mid-2007 may still be continuing. In the fourth quarter of 2008, GDP grew by only 6.8 per cent and evidence for this year so far indicates that the worst may not be over.
For instance, exports in January-February plunged 21.1 per cent, year on year, compared with a 2.8 per cent drop in December. If this presages a first-quarter performance similar to that of the fourth quarter, Beijing must deliver an average quarterly growth rate that is closer to 8.5 per cent for the rest of 2009.
The blow to growth from evaporating external demand should not be underestimated. As the yuan has remained strong against most other currencies throughout the global credit crisis, Beijing also faces a severe policy challenge in cushioning exporters’ pain, as many of them operate in labour-intensive sectors employing large numbers of workers. But mindful of rising protectionist sentiment abroad, and the dangers of competitive devaluations, leaders have said they will keep the value of the yuan stable.
Instead, Beijing may dish out various subsidies to struggling exporters. Even this may not be enough to re-establish net exports as the robust source of growth that it has been in the past few years. Given the lack of global demand, it is possible that net exports could remain a drag on growth in 2009 (shaving off as much as 1.5 to 2 percentage points from the headline GDP growth rate).
In that case, the mainland must rely on government expenditure, domestic investment and, most importantly, private consumption to power the economy. The government has already turned on the fiscal spigot with its 4 trillion yuan (HK$4.54 trillion) stimulus package, and early signs are that investments are coming alive as a result. But, encouraging private consumption in this time of economic uncertainty will be very hard.
One way to change Chinese consumers’ behaviour would be to raise spending significantly on the social safety net so people feel less of a need to save. Another is to lower the tax burden. But the finance ministry is reluctant to raise the personal income-tax threshold. Neither is it keen to expand nationwide the experiment of handing out consumption coupons that has been tried recently in some localities. From the government’s perspective, it has already assumed large fiscal burdens with the stimulus and tax reliefs for the property and export sectors.
With the threat of inflation rapidly receding, however, Beijing has ample leeway on monetary policy to pump-prime the economy. The fact that the central bank has set its inflation target for 2009 at 4 per cent when deflation has returned suggests that monetary policy could become much more accommodating in the coming months. With relatively healthy balance sheets, state-owned banks can also afford to live with a narrower interest-rate spread (which is more than 3 per cent now) should financial authorities slash lending rates.
Should growth lag more than expected, Beijing will pull out all policy stops, including some tinkering with the exchange rate. Unfortunately, policy-makers so far seem fixated on jump-starting investment rather than promoting more consumption - which is more sustainable in the long run.
Certainly, they are likely to get more bang for their buck by showering money on infrastructure projects than on consumption coupons. But, the danger is whether they can swiftly remove such potent booster shots to the economy when the recovery takes off without causing adverse side effects, such as industrial overcapacity and bureaucratic excess.
The government’s commitment to underwrite 8 per cent growth at all costs may make political sense. The economic argument for such a policy, however, is dubious at best.
Xu Sitao is the Economist Intelligence Unit Corporate Network’s director of advisory services in China
1 comment:
One-track minds
Beijing’s 8 per cent growth targets may make political sense, but the economic argument is flimsy
Xu Sitao
19 March 2009
As expected, Chinese leaders reaffirmed their commitment to achieve 8 per cent gross domestic product growth in 2009 during the annual National People’s Congress session this month. Why did they do that? Rightly or wrongly, most Chinese policymakers adhere to the 8 per cent figure as the minimum growth threshold to create enough jobs for the country’s enormous population. But this is a myth. There is no empirical evidence to suggest that if growth fell below 8 per cent, unemployment would rocket, sparking social unrest.
Still, it is worth asking whether Beijing can achieve 8 per cent growth this year. Let’s begin with the Economist Intelligence Unit’s baseline scenario. We believe that the world economy this year will be in a deep recession, but not a depression. A corollary to this is that protectionism will rise and cause more trade frictions but not a full-blown trade war. This is a good start.
For the mainland to reach the 8 per cent target for all of 2009, it must grow by more than that towards the latter part of the year. That is because the economy’s downward momentum since mid-2007 may still be continuing. In the fourth quarter of 2008, GDP grew by only 6.8 per cent and evidence for this year so far indicates that the worst may not be over.
For instance, exports in January-February plunged 21.1 per cent, year on year, compared with a 2.8 per cent drop in December. If this presages a first-quarter performance similar to that of the fourth quarter, Beijing must deliver an average quarterly growth rate that is closer to 8.5 per cent for the rest of 2009.
The blow to growth from evaporating external demand should not be underestimated. As the yuan has remained strong against most other currencies throughout the global credit crisis, Beijing also faces a severe policy challenge in cushioning exporters’ pain, as many of them operate in labour-intensive sectors employing large numbers of workers. But mindful of rising protectionist sentiment abroad, and the dangers of competitive devaluations, leaders have said they will keep the value of the yuan stable.
Instead, Beijing may dish out various subsidies to struggling exporters. Even this may not be enough to re-establish net exports as the robust source of growth that it has been in the past few years. Given the lack of global demand, it is possible that net exports could remain a drag on growth in 2009 (shaving off as much as 1.5 to 2 percentage points from the headline GDP growth rate).
In that case, the mainland must rely on government expenditure, domestic investment and, most importantly, private consumption to power the economy. The government has already turned on the fiscal spigot with its 4 trillion yuan (HK$4.54 trillion) stimulus package, and early signs are that investments are coming alive as a result. But, encouraging private consumption in this time of economic uncertainty will be very hard.
One way to change Chinese consumers’ behaviour would be to raise spending significantly on the social safety net so people feel less of a need to save. Another is to lower the tax burden. But the finance ministry is reluctant to raise the personal income-tax threshold. Neither is it keen to expand nationwide the experiment of handing out consumption coupons that has been tried recently in some localities. From the government’s perspective, it has already assumed large fiscal burdens with the stimulus and tax reliefs for the property and export sectors.
With the threat of inflation rapidly receding, however, Beijing has ample leeway on monetary policy to pump-prime the economy. The fact that the central bank has set its inflation target for 2009 at 4 per cent when deflation has returned suggests that monetary policy could become much more accommodating in the coming months. With relatively healthy balance sheets, state-owned banks can also afford to live with a narrower interest-rate spread (which is more than 3 per cent now) should financial authorities slash lending rates.
Should growth lag more than expected, Beijing will pull out all policy stops, including some tinkering with the exchange rate. Unfortunately, policy-makers so far seem fixated on jump-starting investment rather than promoting more consumption - which is more sustainable in the long run.
Certainly, they are likely to get more bang for their buck by showering money on infrastructure projects than on consumption coupons. But, the danger is whether they can swiftly remove such potent booster shots to the economy when the recovery takes off without causing adverse side effects, such as industrial overcapacity and bureaucratic excess.
The government’s commitment to underwrite 8 per cent growth at all costs may make political sense. The economic argument for such a policy, however, is dubious at best.
Xu Sitao is the Economist Intelligence Unit Corporate Network’s director of advisory services in China
Post a Comment