Some Chinese provinces are planning to lower growth targets in 2014 than the previous year. This is significant because its shows that the Chinese government is changing its focus from expansionary economic policies to policies that will sustain the economy in the long term.Hebei, which borders Beijing to the north, just set a goal for 8 percent growth, which is less than last year’s goal of 9 percent. Similarly, Fujian, in the southeast, and Gansu and Ningxia, in the northwest, are also targeting slower expansionary goals. Specifically, Fujian is targeting a 2014 growth goal of 10.5 percent compared to 11 percent in 2013. Gansu set a 2014 growth goal of 11 percent compared to 12 percent in 2013. Ningxia expects that this year’s growth will be about 10 percent compared to the 2013 goal of 12 percent. The city of Beijing will set a 7.5 percent growth goal for 2014, which 0.5 percent less than the target in 2013.
What is the significance of this? This significance of these provinces lower their growth rates is that it shows that China will be moving away from investment and trade to more inclusive growth. Also, China is now also focusing on the consequences of an investment-based growth. The problems with investment-generated improvements to productivity and technology occur when there is overinvestment, investing more into an asset than its worth, or malinvestment, investing in wrong lines of production that leads to capital losses. Through these two types of investment China increases its GDP inefficiently. Since these types of investment create inefficiencies in the market, China is dealing with a major pollution issue. Another issue is China sets artificial low interest rates, which incentivizes investment. The problem is that the incentive to borrow from banks could lead to a debt bubble, which could lead to a potential financial crisis. By lowering its yearly growth rates, which most of it is due to investment, China is focusing on fixing its pollution issue and on reducing the chance of a financial crisis.
However, even though some of the provinces are lowering its growth rates, not of all them are. Also, the regional targets suggest that the national level of growth will be 7 percent, which is 0.5 less than 2013. Is China doing enough to fix these issues?
http://www.bloomberg.com/news/2014-01-14/china-provinces-set-lower-growth-goals-for-2014.html
3 Comments
“Rebalancing” away from an (undue? = analytic basis for judgment?) reliance on investment may not be so easy. Remember that investment has to be matched by saving (using appropriate macro definitions) and a decree that growth will be lower may not affect saving, in which case consumption won’t rise.
There might other factors that might have discouraged provinces to lower their expected growth rates. However, as this post points out, if the way of growing the economy is not efficient, then there has to be a problem at the end.
However, I am not really sure how this problem is connected to the pollution problem.
Pollution has been a serious problem for a long time in China. I still can remember before the 2008 Beijing Olympics, the Chinese government set up a rule that did not allow people to ride/use on cars on certain days. How is over-investment related to pollution?
One other point: in the past provincial officials were evaluated on the basis of the growth their province delivered. So here Savas reports on a very substantive change if in fact provincial officials no longer believe that their promotion relies on a “bigger is better” criterion. It’s easy for Beijing to state they want to rebalance, but if they don’t change the incentives officials face then, well, who cares (or more pointedly, which official cares)?
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