It’s no easy task for China’s leadership to govern a country of 1.4 billion. It’s a burden that no leader of any other advanced economy faces.
Included in Beijing’s overall challenges are its domestic and economic policies, both of which are intertwined. Sufficient growth must be maintained when a key objective of the Communist Party and Beijing’s leadership is maintaining social order and delivering for the country’s population a better quality of life. For much of China’s population a better quality of life translates today to a good job and increasing income. Longer-term it includes a better environment including reduced pollution.
It’s difficult for many in the western world to understand Beijing’s pressure to create more than 10 million new urban jobs annually. Last year, Beijing succeeded and 13 million new urban jobs were created, which I view as a great economic success despite a year of lower GDP growth. To put this monumental task in perspective, the United States only needs to create 1.3 million new jobs annually.
All aspects of continuing to evolve China’s economy from one that is centrally planned to a market economy with Chinese characteristics is continuing to be a major challenge for Beijing.
The headwinds that China’s economy faces are many. Most of us like to think that Beijing’s leadership has significant control over its own economic destiny. To a large extent this is wishful thinking, not based on what China’s leadership is able to impact, but more importantly given on what its leadership is unable to impact. Premier Li Keqiang has stated that China has more economic tools available if the “new normal” of reduced growth impacts job growth and income, but Beijing can’t impact foreign demand for China’s manufactured goods.
It’s clear that China’s three decades of growth in excess of 10 percent are long gone. Logical thinking results in the conclusion that China’s economy couldn’t continue to grow at the above 10 percent rate indefinitely, but many of us believed or wanted to believe that the economy would.
This becomes even more clear when one understands the basic “law of large numbers,” which applies not only to companies, but also to nations. Specifically, the larger an economy grows, the harder it becomes to keep growing at that same rate. For example, if China’s economy grows at 7 percent in 2015, it is actually generating more additional economic output than its economy did in 2007 when China’s growth rate was 14 percent. If you think about it, it’s easy to comprehend. But if most of China’s population are fixated on growth of less than 10 percent as being unacceptable, it’s a challenge for the leadership in Beijing to convince them otherwise.
China’s 7 percent growth target for 2015, which was confirmed when the National People’s Congress met in March, should have been viewed internationally as a very positive announcement. But it wasn’t. Instead the news was generally reported in the context of comparing the 7 percent target to the years of growth in excess of 10 percent. For the most part, the global media reported the 7 percent growth target as a failure, and viewed the reduced growth target as evidence that there was something structurally wrong with China’s economy.
One conclusion is apparent. Many foreigners and governments want China to fail, not understanding that both their own country and China can’t both thrive at the same time. For example, China doesn’t have to fail for the U.S. economy to flourish. Instead, what should have been highlighted by the international media was how strong China’s projected growth for this year is compared to the projected growth of both advanced economies and other emerging market economies.
It is an eye-opener to compare China’s targeted growth rate with that of the world and the United States. The International Monetary Fund (IMF) has projected global growth for this year at 3.5 percent, less than half the rate of China.
The U.S. economy is projected to grow at a rate of 3.6 percent this year. Yes, China’s projected growth rate is almost double that of America’s. It’s true that the U.S. is an advanced economy, one that is not expected to grow at as great a rate as an emerging economy, but America’s growth rate was reported as a major accomplishment, while China’s growth rate of double that of the U.S. was reported as a failure.
The headwinds that China’s economy faces are many and clear. Over time, growth is a function of labor, capital and productivity. When all three increase, as they did in China for over three decades, growth was above 10 percent. But, China’s working age population peaked in 2012; investment also peaked at 49 percent of GDP. a percentage few countries have ever seen;,and China’s technological gap compared to advanced economies is narrower than it has been in the past, resulting in lower growth from productivity gains.
But let’s look at some good news regarding China’s economy. China’s average disposable income outpaced the country’s GDP last year, increasing 8 percent to approximately $3245. China also created 13 million new urban jobs in 2014. Unemployment is at a somewhat reasonable rate of 5.1 percent.
As long as China’s leadership is able to keep income and employment levels up, Beijing’s leaders should have the political ability to proceed with some of the more painful reforms that are generally acknowledged as necessary, but that Beijing avoided implementing last year.
China’s economic miracle was driven by the growth of the country’s export industries. If there is one major factor since the 2008 global financial crisis that impacted China’s growth rate, it has been a weak export sector. Since 2008, the global economy has sputtered, reducing imports of Chinese manufactured goods. Decreased demand for China’s manufactured goods are the primary reason that the “new normal” targeted growth rate for 2015 is 7 percent. Exports, which have been major drivers of China’s growth are difficult for Beijing to impact. The tumble in price of the euro currency and the yen, are other factors that Beijing can’t control, but which also have a significant impact on China’s exports and therefore its economy and growth rate.
As China’s economy continues to evolve to more of a market economy, one increasingly based on private enterprise and entrepreneurship, the country’s sustainable growth is increasingly less dependent on infrastructure development, spending and investment by local governments, and state-owned-enterprises. While these can all be easily impacted by Beijing policies and will “deliver growth,” most will not lead to long-term sustainable growth.
All of this leads me to China’s annual growth targets. Growth targets may be appropriate in a Soviet style planned economy, but they’re not appropriate for today’s China, as the country moves further toward its goal of a market economy with Chinese characteristics.
China’s practice of targeting growth rates is disadvantageous and should be ended. Stating a growth target establishes a measuring stick that becomes problematic. Targeting growth puts pressure on Beijing to “deliver growth” at all cost. The growth measuring stick also puts pressure on local government leaders and management of state-owned-enterprises to deliver growth at all costs. Annual growth targets establish unrealistic expectations for China’s economy from entrepreneurs and most importantly and of great concern to Beijing, the hundreds of millions of China’s workers.
Last year, in 2014, China missed its growth target by a tenth of one percentage point. This became an embarrassment for Beijing and also for local authorities who felt pressured to achieve their annual numbers. A result was increased local debt, and the continued operation of many inefficient and polluting smokestack industrial operations that rightly should have been closed.
If targeted growth is not met, it also creates anxiety for China’s population, which can negatively impact consumer spending, increasingly important as a driver of China’s economic growth.
What is the alternative? Instead of a growth target, Beijing should instead focus on job growth and income. More importantly China’s leadership should implement long-term strategies to deliver more and better jobs, grow income and provide a better environment for China’s population of 1.4 billion. This is definitely a difficult task, but one that is easier for Beijing to achieve if it isn’t focused on publicly-announced GDP growth targets.
Author: Jeffrey Friedland
Jeffrey Friedland is CEO of the financial services firm Friedland Global Capital, which provides corporate finance and strategic advisory services to entrepreneurial companies in emerging and frontier markets.
He first traveled to China in 1988, opened an office in China in 2003 and continues to make frequent visits to the Asia-Pacific region, including China. He is an author, speaker and thought leader on emerging and frontier markets, and the global economy.
Mr.Friedland has been the chief executive officer and a director of a NASDAQ listed financial services company, a director of a New York Stock Exchange listed company with all of its business operations in China and chairman of the board of a Frankfurt Stock Exchange listed company with Chinese operations
Mr. Friedland is author of the book, All Roads Lead to China, which is an investor road map to the world’s fastest growing economy, which is available in both print and Amazon Kindle versions.
He has been featured or quoted in numerous publications including the Wall Street Journal, USA Today, the South China Morning Post and Forbes, and is a regular contributor to Money China.
Mr. Friedland has been a frequent speaker at conferences and events throughout North America, Europe and Asia, including speeches to individual and institutional investors on emerging and frontier markets.