Growth goals 'should be done away with'

Economist says if annual GDP targets are not met, people think there has been a failure

Cai Hongbin, one of China's most respected economists, believes the setting of national annual economic growth targets is increasingly placing too much pressure on the country's economy.

The dean and professor of applied economics at Guanghua School of Management says there remains a culture that missing the target constitutes a failure. The current target of about 7 percent was set by Premier Li Keqiang in March.

"Everybody is reading that single number and that creates a sort of pressure where if the economy does not reach that annual target, everyone will say that it is a failure," he says.

The academic, who is also a member of the National People's Congress, the national legislature, was speaking at Guanghua, one of China's leading management schools and part of Peking University.

He thinks China's policymakers have already recognized that a rigid target is no longer needed by prefixing it with "about", although analysts and the financial markets now interpret this as meaning the goal is now within 0.3 percentage point on either side of the set figure.

"I think even though their (the policymakers) view is starting to change, in practice, it is not yet there yet. There is still a mindset from central planning times where people want to set a target.

"The figure that is set should really be a forecast. Even if we say that we want to achieve this, it shouldn't be the case that we go out to achieve it no matter what. That is not the right approach."

He thinks that if China is to move toward a more market-driven economy, the setting of a growth target should become redundant.

"If we really believe in a market economy, it is the market that plays an important, critical role in resource allocation. No market economy can say it is going to grow by 7, 6 or 5 percent."

Cai, in his role with the NPC, called for an overhaul of growth targets two years ago, wanting them replaced with a series of locally set targets at city and provincial level.

"I think we should set targets bottom up rather than top down. The problem with the top-down system is that there is a ratchet-up effect since nobody wants to miss the national target and be the worst performing.

"If each city and province set its own target, it would do so in accordance with its own conditions and plans."

The 48-year-old economist, who is also a contributor to leading international journals, believes there is far too much of an obsession both within China and internationally about what the current GDP growth figure actually is, often leading to short-term thinking.

"If we just focus on the current quarter or yearly growth rate, you sometimes lose the big picture. Instead of paying too much attention to whether we reach 7 or 6.5 percent this year, we should be looking at whether we are on the path to sustaining reasonably high growth over the longer term."

He says if this approach was taken there would not be quite the concern about the impact of reform measures on short-term growth.

"We need to be able to implement reforms as required at each point and see that there is no intrinsic conflict between growth rate versus reforms with only the long-term goal in mind."

Cai, who is from Xinyu in Jiangxi province in eastern China, originally studied mathematics at Wuhan University before switching to economics for his master's at Peking University.

"In the 1980s, China had just started the reform process and all the discussions were about what was the right economic system, how the market economy works as well as agricultural and SOE reform, and these issues fascinated me. There was no clear answer in mathematical terms so that led me to study economics."

He went on to do a doctorate in economics (as well as a master's in statistics) at Stanford University in the United States before teaching at UCLA and also Yale.

In 2005, he was persuaded to come back to China to teach at Guanghua School of Management, taking over at the helm in 2010.

"Our aim is for Guanghua to be a world-class business school based in China and not only to benefit the China economy and society by developing future business leaders but to have the largest possible impact on the international stage also. So Guanghua is one of the first places that comes to mind when foreign students and academics think about business education."

Cai, who also sits on the boards of China Unicom and China Everbright Bank, thinks the current debate as to whether there is now a new form of management thinking that is distinctly Chinese is overstated.

"There is this debate as to the Western and Chinese models of doing business, but I think the reality is that there are a lot of common principles in business. If you simply copy what you do in one country in another, such an approach would be too naive and unlikely to succeed."

Despite being against attempts to achieve a particular growth target at all costs, he is not opposed to some of the recent stimulus measures taken by the government, which he says have been in response to weak aggregate demand.

He says part of the problem was the tight macroeconomic policies followed in the three years up to last year.

"I think part of the reason we have a decelerating growth rate and a weak economy is that macro policies did not adjust fast enough when the economy cooled down quite considerably."

Cai, however, thinks there has been a major international overreaction to China's currency depreciation in August as well as the stock market crash after a year-long boom.

Many have questioned whether the government should have stepped in to prevent greater share price falls.

"My view is that when the stock market goes really high, there is some potential for a crisis and the judgment has to be whether there is a potential for systemic risks. I think the government judged at the time there was systemic risk."

One of the big economic debates in China is whether the country needs to move to a new economic model based on services.

The academic maintains that manufacturing remains key to China's future economic success. He is a supporter of the recent Made in China 2025 manufacturing plan.

"People say that services is good and manufacturing is bad but I completely disagree with this. I think if the manufacturing sector becomes stronger, then the services sector will grow out of that."

The other major hurdle China has to get over is the opening up of its capital markets, which HSBC bank forecast could happen as early as 2020.

"I don't think we should have a deadline for this. I also don't think the complete openness of the capital account should be a goal in itself.

"I think to do it at the wrong time could be pretty dangerous and I think right now it would be bad for China because there has been too much fluctuation and volatility."

Cai is adamant that it is important for policymakers to think very long term and to avoid knee-jerk responses.

"When you are making a very long journey, the most important thing is that you reach your destination since along the way you will meet many unexpected situations."

andrewmoody@chinadaily.com.cn

(China Daily USA 10/02/2015 page10)