Growth goals ‘should be done away with’
Economist says if annual GDP targets are not met, people will say that it is a failure, reports.
Cai Hongbin, one of China’s most respected economists, believes the setting of national annual economic growth targets is increasingly placing too much pressure on the country’s economy.
The dean and professor of applied economics at Guanghua School of Management said there remains a culture that missing the target constitutes a failure. The current target of about 7 percent was set by Premier Li Keqiang in March.
“Everybody is reading that single number and that creates a sort of pressure where if the economy does not reach that annual target everyone will say that it is a failure,” he said.
The academic, who is also a deputy to the National People’s Congress, the national legislature, was speaking at Guanghua, one of China’s leading management schools and part of Peking University, which he has led for five years.
He believes China’s policymakers have already recognized that a rigid target is no longer needed by prefixing it with “about”, although analysts and the financial markets now interpret this as meaning the goal is now within 0.3 percentage points either side of the set figure.
“I think even though their (the policymakers’) view is starting to change, in practice it is not yet there yet. There is still a mindset from central planning times where people want to set a target.
“The figure that is set should really be a forecast. Even if we say that we want to achieve this, it shouldn’t be the case that we go out to achieve it no matter what. That is not the right approach.”
He is confident that if China is to move toward a more market-driven economy, the setting of a growth target would become redundant.
“If we really believe in a market economy, it is the market that plays an important critical role in resource allocation. No market economy can say it is going to grow by 7, 6 or 5 percent.”
Cai, in his role with the NPC, called for an overhaul of growth targets two years ago, wanting them replaced with a series of locally set targets at city and provincial level.
“I think we should set targets bottom-up rather than top-down. The problem with the top-down system is that there is a ratchet-up effect since nobody wants to miss the national target and be the worst performer.
“If each city and province set its own target, it would do so in accordance with its own conditions and plans.”
The 48- year- old economist, who is also a contributor to international journals, believes there is far too much of an obsession both within China and internationally about what the current GDP growth figure actually is, often leading to short-term thinking.
“If we just focus on the current quarter or yearly growth rate, you sometimes lose the big picture. Instead of paying too much attention to whether we reach 7 or 6.5 percent this year, we should be looking at whether we are on the path to sustaining reasonably high growth over the longer term.”
He said if this approach was taken there would not be quite the concern about the effect of reform measures on short-term growth.
“We need to be able to implement reforms as required at each point and see that there is no intrinsic conflict between growth rate versus reforms with only the long-term goal in mind.”
Cai, who is from Xinyu in Jiangxi province in southern China, originally studied mathematics at Wuhan university before switching to economics for his master’s at Peking University.
“In the 1980s, China had just started the reform process and all the discussions were about what was the right economic system, how the market economy works as well as agricultural and SOE reform, and these issues fascinated me. There was no clear answer in mathematical terms so that led me to study economics.”
He went on to do a doctorate in economics (as well as a master’s in statistics) at Stanford have a decelerating growth rate and a weak economy is that macro policies did not adjust fast enough when the economy cooled down considerably.”
Cai, however, thinks there has been a major international overreaction to China’s currency depreciation in August as well as the stock market crash after a yearlong boom.
Many have questioned whether the government should have stepped in to prevent greater share price falls.
“My view is that when the stock market goes really high, there is some potential for a crisis and the judgment has to be whether there is a potential for systemic risks. I think the government judged at the time there was systemic risk.”
One of the big economic debates in China is whether the country needs to move to a new economic model based on services.
The academic maintains that manufacturing remains key to China’s future economic success and is a supporter of the recent Made in China 2025 manufacturing plan.
“People say that services is good and manufacturing is bad, but I completely disagree with this. If the manufacturing sector becomes stronger then the services sector will grow out of that.”
The other major hurdle China has to get over is the opening up of its capital markets, which HSBC bank forecast could happen as early as 2020.
“I don’t think we should have a deadline for this. I also don’t think the complete openness of the capital account should be a goal in itself.
“To do it at the wrong time could be pretty dangerous, and right now it would be bad for China because there has been too much fluctuation and volatility.”
Cai is adamant that it is important for policymakers to think very long term and to avoid knee-jerk responses.
“When you are making a very long journey, the most important thing is that you reach your destination since along the way you will meet many unexpected situations.”
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