China’s GDP growth target for 2013 was set at 7.5 percent in March, but just four months later, on July 11 at a press conference in Washington China’s newly established minister of finance, Lou Jiwei, seemed to suggest that Beijing no longer believed the country would hit the target. With his announcement that “the 7 percent goal should not be considered as the bottom line” for this year’s GDP growth, the finance minister set off a flurry of nervous excitement and commentary that, although it was not widely discussed in the mainland press, nonetheless caused the Shanghai stock market to fall.
For years China’s reported GDP growth always substantially exceeded its officially targeted annual growth rate, but after two years of sharply declining growth, Lou’s comments appeared to imply that growth rates were set to drop even further. Within a day of Lou’s statement in Washington, however, China’s official Xinhua News Agency corrected and rephrased the quote. “There is no doubt,” Xinhua reported him as having said, “that China can achieve this year’s growth target of 7.5 percent.” Two days later, second-quarter data were released and, coincidentally or not, China’s second-quarter GDP grew by exactly 7.5 percent year on year (although quarter-on-quarter growth clocked in at just under 7 percent).
Whatever the reason for changing Lou’s earlier comments, China’s most thoughtful economists are increasingly skeptical about the need for high GDP growth rates. And they should be. GDP growth rates over the next several years of 7.5 or even 7 percent will prove to be impossible to achieve without a dangerous increase in debt on an already-fragile national balance sheet, and China already relies too heavily on debt-fueled investment to achieve high levels of GDP growth. This must change.
Pettis, an expert on China’s economy, is professor of finance at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets.
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