China soft­ens GDP tar­get to toughen re­form

The Pak Banker - - 6BUSINESS -

"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.

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