In a system in which almost all the growth is driven by increases in investment, and in which an increasing share of investment is being wasted on factories, bridges, real estate, airports, and other projects that have little or no economic value, rising debt can be a very worrying problem since the ability to service that debt is rising much more slowly than the debt. But if Beijing wants an economic reThe 2013 NPC and CPPCC Annual Sessions have ended with the formal selection of China’s new leaders. Not surprisingly there were few surprises. My quick take is that the leadership is saying all the right things, but they have been saying these things for quite a while – nearly two years in the case of Li Keqiang, the new premier.
The constraints they face, however, have neither changed nor been addressed. First, any real rebalancing means much slow growth than Beijing seems willing to tolerate. Second, the groups (“vested interests”) that have benefitted from the old growth model remain very powerful and very reluctant to allow any erosion of the benefits they have accrued.
In March, in his last formal State of the Union speech as China’s premier, Wen Jiabao announced that the 2013 growth target for China’s economy was 7.5 percent. Here is the Xinhua article on the speech:
A growth target of 7.5 percent and a greater focus on consumption and economic reforms were some of the goals set out by Premier Wen Jiabao in a keynote address on Tuesday. An inflation target of 3.5 percent was set, below the 4 percent target of 2012, Wen said in his last Government Work Report to the National People’s Congress. The growth target is the same as last year’s, when GDP increased by 7.8 percent from a year earlier, a 13-year low. Economic growth in 2011 was 9.3 percent and 10.4 percent in 2010.
Until 2011 China’s economic growth easily exceeded the target set by the government, but something strange happened this year. For the first time that I can remember, after issuing the target growth rate for the year, Premier Wen seemed to warn that the target would be difficult to attain. More specifically, he acknowledged that there was “growing conflict between downward pressure on economic growth and excess production capacity”.
China, in other words, is producing far more of everything than it can absorb or export, but the only way to keep growth high has been to invest even more, at least part of which creates even greater production capacity. This is what will make attaining the growth target difficult. The policy with which Beijing has been able to keep growth high for so many years has itself become a problem.
