China softens GDP target to toughen reform
"The soft overcomes the hard, the gentle overcomes the rigid," said Chinese philosopher Lao Tzu about 2,500 years ago. China's top leaders have taken the ancient wisdom to heart in the battle against economic headwinds.
By setting the GDP growth target in 2016 at a range from 6.5 to 7 percent instead of a specific figure, the Chinese government has applied more flexibility in economic management, making room for structural reform to realize long-term growth.
It is the first time China has offered an annual growth target range in two decades, and the change itself is remarkable. For the past three decades, the Chinese economy has enjoyed enviable rapid growth, and the pace of which often surpassed official GDP targets.
No countries could sustain such fast growth forever, especially for an economy as large and complicated as China's. Obsession with a high GDP growth target could delay the inevitable transition to a more sustainable model.
By setting a flexible GDP target, the central government has sent a strong signal to local officials that the figure alone is not what they should strive to seek. To steer the economy onto a more sustainable path, a more dynamic evaluation system, including environmental standards for local governments, should be established. That does not mean the target is no longer relevant, however. The floor of 6.5 percent is a guideline for the minimum rate of growth needed in the coming five years to meet the goal of doubling GDP and per capita income from 2010 to 2020. The upper guide, at 7 percent, is slightly higher than the 6.9-percent growth rate achieved in 2015, and can boost confidence if successfully met.
Achieving the minimum 6.5 percent growth should not be hard for a country with ample policy tools. Interest rates are still high compared with those in many developed countries, suggesting room for more monetary stimulus if necessary. Fiscal policies have yet to play a greater role, with the deficit ratio ready to expand. The savings rate remains high, suggesting potential for more consumption and investment. Income levels are climbing, giving rise to an emerging middle class with growing purchase power. With a more flexible GDP target in mind, local governments can focus more on the arduous tasks they are facing. Empty houses could pose a risk to the pillar real estate sector, while industrial restructuring could bring unemployment rarely seen since the late 1990s, when reform of the country's state-owned enterprises left many jobless.
Re-employment of workers along with structural reform will be a major task for many local officials, as the central government has repeatedly claimed keeping the employment rate stable should be a priority. Fortunately, with a much more developed social welfare system and economic foundation, the industrial ills can be addressed with fewer pains than the 1990s.
Flexibility also means the "invisible hand" can play a bigger role in resource allocation. The government should take the opportunity to further cut red tape and unleash vitality in the private sector, while letting innovation thrive without unnecessary intervention. The Chinese economy has come to a point where reform is a must to sustain the country's long-term prosperity. By setting a flexible GDP target, the government has taken another step forward.
Meanwhile, a senior economic planning official in China said: China will not see another upsurge in layoffs like the one seen in the 1990s as China seeks to revitalize the economy by cutting industrial overcapacity. "On the whole, I'm optimistic about China's job market," said Xu Shaoshi, head of the National Development and Reform Commission, at a press conference on the sidelines of the annual parliamentary session.
He cited five reasons for his optimism. First, some enterprises have taken measures including cutting working hours and salaries to avoid laying off their employees.
Second, although China's growth speed has slowed somewhat, its economic aggregate is growing larger. One percentage point of growth in gross domestic product now translates to an addition of 1.6 million jobs. Third, the fastgrowing service industry is a reliable source of job creation. In 2015, the service sector accounted for 50.5 percent of China's GDP, the first time it has exceeded the 50-percent level.
Fourth, the growing zeal for innovation and entrepreneurship means more people are starting their own businesses. In 2015, 4.4 million new enterprises were registered. This translates to 12,000 new ones every day. Fifth, with the development of social mobility and information exchange, it is easier and faster for people to find jobs that match their ability and interest.