At this time of year, many policymakers want to know how fast their economies will grow in the year ahead. China’s leaders set themselves a still tougher question: how fast their economy “should” grow. They are seeking not a forecast but a target.
A boy poses with a Chinese national flag in front of Tiananmen Square in Beijing.. (Reuters)
A boy poses with a Chinese national flag in front of Tiananmen Square in Beijing.. (Reuters)
The Central Economic Work Conference will conclude as The Economist goes to press. At the event, Communist Party officials will have debated whether to stick with this year’s growth target of “around 5%”. Their answer, which is not usually revealed until March, will guide fiscal and monetary policymaking in the year ahead, as well as the borrowing and spending plans of state-owned enterprises. Early signs suggest that officials will set an ambitious goal. In recent days party leaders have promised “extraordinary” efforts to fight China’s slowdown, including a “moderately loose” monetary policy and a “more proactive” fiscal policy. They have also resolved to boost consumption “vigorously”.
So what number should they pick? The textbook answer is that an economy should expand as fast as it can without jeopardising price stability. If GDP exceeds its speed limit (the “potential” rate of growth) demand will outstrip supply, and inflation will rise uncomfortably. By this yardstick, China’s economy has room to accelerate. Consumer prices rose by only 0.2% in November, against a year earlier, far below the government’s ceiling of 3%.
In China, though, the link between growth and inflation is puzzling, according to Gao Shanwen of SDIC Securities, a financial firm. The two used to have a steady relationship. Core inflation (excluding volatile food and energy prices) rose or fell in line with the “output gap” between potential and actual GDP. Yet this relationship has broken down in the past two years, he argued during a recent talk in Shenzhen, a southern tech hub. Growth has been close to the speed limit; inflation has been “abnormally” low.
Perhaps the problem lies with the data. “China’s economic data is generally good,” he said, diplomatically. “But some data are better than others.” Prices, for example, are relatively easy to collect. You can leave your Shenzhen hotel and look up the price of an apple at a shop door, he pointed out to his conference audience. Calculating GDP is trickier. So if growth and inflation are suddenly out of whack, maybe growth has been overstated. Cut three percentage points from China’s growth—reducing it from about 5% to about 2% for this year, for example—and its relationship with inflation becomes “completely normal”, Mr Gao said.