Domestic Reforms Unleash Development Dividend

By staff reporter LUO YUANJUN

In last March’s government work report to the National People’s Congress, China’s top legislature, Premier Li Keqiang announced that the country’s growth target for this year is around 7.5 percent. In terms of other economic matters, China plans to rein in consumer price index (CPI) growth to about 3.5 percent, create 10 million or more new urban jobs, and cap the registered unemployment rate for urban residents at 4.6 percent. It also vows to maintain basic balance of international payments, to retain the rise in citizen incomes in tandem with economic development, and to step up overall planning of major issues such as GDP growth, employment, pricing, and international payments.

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Why 7.5 Percent?

The Chinese government has set the 2014 GDP target at around 7.5 percent on the basis of the current situation in the country, where China is purposely gearing down economic growth, while the overhauling of its economic structure and earlier stimulus policies have just begun to show effect.

As the premier explains in the report, China is still a developing country in the early stages of socialism, where development holds the key to solving all the problems it faces. It must, therefore, focus on economic development to sustain its economic growth at a reasonable rate. Careful calculations and scrutiny of needs and challenges have led to China setting its 2014 growth target at around 7.5 percent.

According to Wang Xiaodong, executive vice-governor of Hubei Province, although China no longer gauges its development merely by GDP figures, it will continue to press on with economic growth.

When the 7.5 percent target was revealed, the Wall Street Journal interpreted it: “This matches the projection for the past two years and is roughly the same as every year in the past two decades, when the target rate has been between seven percent and eight percent, all apparently designed to signal stability and continuity.” The Straits Times of Singapore called it part of China’s efforts in “leaving room for slower but quality growth as the country embarks on one of its most ambitious reforms in three decades.” Reuters, meanwhile, commented: “Some analysts had welcomed the 7.5 percent goal as a sign that Beijing will keep the world’s second-biggest economy on a steady footing, while pursuing sweeping reforms likely to dampen activity in the near term.”

The 7.5 percent target takes into account China’s practical needs to boost market confidence, to optimize the economic structure, and to realize its long-term goal of building a better-off society. Stable economic growth is also needed to provide employment for urban residents joining the labor market for the first time, as well as for farmers seeking their fortune in the city. Calculations show that, only if the Chinese GDP expands by 7.5 percent for the year, would China be able to create no less than 10 million jobs and keep urban unemployment below 4.6 percent.

Rational wiggle room should be allowed for growth projections. As president of the China Institute for Reform and Development (CIRD) Chi Fulin noted, this year the government work report’s wording: “increase GDP by about 7.5 percent,” indicates the rate is not the rock-bottom requirement as before, and slightly up or down would be acceptable.

According to Yuan Zhigang, dean of Fudan University’s School of Economics, this year China is poised to walk a fine line between economic growth and restructuring. Last July, Premier Li Keqiang raised the idea of “reasonable range” growth, signifying new thinking among Chinese leaders in terms of macroeconomic controls: when the economy is staying afloat well above the baseline, the government will focus on reforms and restructuring; when growth is decelerating and approaching the red line, attention will be shifted toward stabilizing growth and controlling risk.

This means China’s policymakers will be less squeamish about any economic slowdown, becoming more concerned about long-term effects of macroeconomic regulation, rather than short-term losses or gains. Peng Sen, a member of the Standing Committee of the National People’s Congress and vice-chairman of its Financial and Economic Affairs Committee, ruled out the chance of China rolling out another massive simulative program like the one during the previous financial crisis. Actually, none of the State Council meetings the premier has convened over the past year discussed possible plans for short-term stimulus.

In terms of how to choose the best economic policies, the premier holds the view that short-term stimulus might be used as an expedient measure to reverse an economic slump but offers no solution to underlying problems. He therefore opts for stable macroeconomic policies that can yield long-term benefits without incurring damage in the short term.