Why is 8% China’s Hurdle

Thursday, March 12, 2009 20:38
Posted in category The Big Picture, Uncategorized
Comments Off on Why is 8% China’s Hurdle

Early on, as the rest of the world slid into economic recession, China was being held up as the only economy that would grow in 2009.

In the first half of 2008, when US mortgage banking was beginning to show real signs of problems,  things were still on a torrid pace here.  We had gone through a snowstorm that knocked out 17 provinces of power, and a devastating earthquake, but 10%+ GDP was still a hurdle easily cleared.

In the summer, things began to slow down.  China was short on energy, “Non-core” inflationwas rising fast, and a lot of chatter about China’s competitive position were coming into the fray.  The mortgage crisis was on the brink at that point, but the economic picture for China was stilll good.  Sure, there would be a bit ofa fall from its 10 year marathon pace, but that was not necessarily a bad thing. After all, the central party was putting in policies and taxes to slow the train down a bit.

As the economic crisis continued though, and China’s exposure to the problems grew, it was clear to many that China’s plans to slow the economy were at risk of overshooting.  GDP projections were coming down, and there was talk that China needed to hit 8% GDP growth to keep it together.

8%

It was a number that really had little meaning to most of us, and I personally was not sure what 8% meant.  Sure, I knew that China has to maintain growth to continue the process of moving people from the farm to the middle class, and of course they needed to continue to create jobs, but what else did 8% really represent?

In a fantastic piece for Foreign Policy magazine called Beijing’s GDP Numerology, Drew Thompson dives into this question and provides some historical and present day context:

In all questions of faith, look first to one’s creator. In this case, that means Deng Xiaoping. At the 12th Party Congress in September 1982, Deng determined that the national economic goal would be to quadruple the annual industrial and agricultural output of the entire country by the end of the century. Prior to the big meeting, Deng asked then General Secretary Hu Yaobang how the country could quadruple its economy from 710 billion yuan in 1980 to 2,800 billion yuan in 2000, and Hu responded that 8 percent annual growth would do the trick. That’s it. There’s no complicated secret formula, no hallowed equation precisely linking growth to employment, no connection to the revered words of Confucius, Mencius, or Lao-tzu. Back in 1982, it was determined that it would take 8 percent annual growth to quadruple the economy by 2000.

The end of the century has come and gone, but the target has remained the same. Subsequent five-year plans have all set an annual growth target between 7.5 and 8.5 percent. This national objective has since become the obsession of officials at each level of the government’s vast bureaucracy.

A knowledgeable China guy, and quite sharp otherwise, what I like about Drew’s take on this is simply that he also is of the view that in the end the number itself means little. That it is what is behind the number that counts: jobs, the price of pork, keeping people content in the fact that they are doing the best they can given the circumstances.

Perhaps more importantly though, and a topic I have yet to see much coverage on, it will be VERY important to make sure the pain is felt evenly. Making sure that it is not just the countryside, or migrant workers who are feeling the pain, while the city folk remain insulated from hardship.

Ongoing, the focus on the 8% will only grow, and as the other global economies continue on their path, the ability to defend this 8% will ony grow more difficult. It will become a problem for policy makers only because they have not yet qualified or defined what the 8% means. Were they to spend the time to do that, then I am pretty sure they would be able to openly say… we will hit 4%, and that is just fine for us.

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