China's Financial Hub Shanghai Lifts Bar by Dropping GDP Goal

An analysis by Michael Lelyveld
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The Bank of China Tower in Shanghai's Lujiazui Financial District, Nov. 25, 2014.
The Bank of China Tower in Shanghai's Lujiazui Financial District, Nov. 25, 2014.

China's financial power center Shanghai is setting a policy precedent for the country by deciding not to issue an economic growth target this year.

Breaking with tradition, Shanghai's mayor, Yang Xiong, said in an annual report on Jan. 25 that the city had ended the practice of setting numerical targets for local gross domestic product (GDP).

"Not mentioning the GDP target for the first time in more (than) three decades is a sign that the country's biggest metropolis has shifted its attention from the quantity to the quality of economic growth, and how economic growth can bring real benefits to the well-being of residents," an editorial by the official Xinhua news agency said.

Yang said the municipality would maintain steady growth and change its growth model "from investment-driven to innovation-driven."

The report to the Shanghai People's Congress stressed technological development, focusing on aircraft engines, brain science and artificial intelligence, Xinhua said.

Shanghai is believed to be the first provincial-level government to turn away from annual GDP targets, which have also been a staple of national economic policy and a remnant of central planning.

Pursuit of high GDP growth rates has been blamed for a multitude of problems, including slipshod construction, energy waste and pollution.

Quality of life issues

Since taking office in 2013, President Xi Jinping and Premier Li Keqiang have softened the government's focus on hard GDP targets, urging officials to pay greater attention to quality of life issues.

In December 2013, the Organization Department of the Communist Party of China (CPC) Central Committee promised to "shift away from GDP-obsessed assessments of local governments as the nation attempts to bring its economy onto a more sustainable track," Xinhua reported at the time.

Local governments were told to "abandon the development mode of  'high investment and heavy pollution for fast growth rate' and set more evaluation criteria related to resources, the environment, scientific innovation, employment, income, health and social insurance."

It is unclear whether Shanghai is simply taking the lead in following the CPC's directives or reacting with uncertainty to a 24-year low in the national growth rate for 2014.

The official press has highlighted lower targets by several other provinces for 2015 after last year's national growth narrowly missed the government's 7.5 percent goal, coming in at 7.4 percent.

But Shanghai's decision to rule out GDP targets for the future stands out as a precedent.

"I have to say I was quite surprised by this," said Gary Hufbauer, senior fellow at the Peterson Institute for International Economics in Washington.

Further growth decline

Hufbauer said one possible explanation is that officials are trying to prepare the public for further drops in GDP growth rates.

"To stop talking about targets is one of the ways to go about this," he said.

Both central and local governments may also be trying to shift the benchmarks for measuring their success to improvements other than raw growth.

But Hufbauer also sees a connection to China's long- standing trouble with compiling reliable economic data.

The National Bureau of Statistics (NBS) has struggled for years to keep provincial and local officials from exaggerating growth statistics in order to pump up their chances for promotion, according to numerous state media reports.

Despite a series of reporting changes and promises of reform, problems of data fraud have persisted, leading to major disparities between national GDP estimates and provincial totals.

In December, the NBS announced it would no longer use GDP figures from the nation's 31 provinces, municipalities and autonomous regions after local reports for the third quarter of last year exceeded the national total by 5.37 trillion yuan (U.S. $859.6 billion), or more than 12 percent.

Break the cycle

The Shanghai announcement suggests that officials may be trying to break the cycle of setting high GDP goals, which then may be met by a combination of excessive production and data fraud.

"My own view that the problem has never been GDP targets or aspirations but rather falsification, misreporting or too optimistic reporting of the data," Hufbauer said.

Thomas Rawski, a University of Pittsburgh professor of economics and history, sees many of the same signals coming from Shanghai's decision to forgo GDP goals.

"They've been talking about the importance of qualitative developments for a long time," said Rawski. "And yet, in many areas people have gone along continuing to follow traditional patterns without much change."

"This could be the opening round in a change that may spread to other places," he said.

Rawski said GDP targets, often associated with China's rapid rise, have also done a lot of harm.

"This pursuit of preset growth targets creates a lot of difficulties, a lot of costs, a lot of wasted investment and, I myself think, a lot of data falsification, all of which are damaging to longer-terms objectives," said Rawski.


Local data fraud may also cast doubt on the accuracy of NBS estimates of GDP.

"The controversial aspect is whether such data manipulation does or does not take place at the national level," Rawski said.

Speculation abounds over what GDP growth target Premier Li will set for this year, perhaps when he presents his government work report to the National People's Congress next month.

Some educated guesses have put the goal at 7 percent, but last month the International Monetary Fund lowered its forecast for China's GDP growth this year to 6.8 percent from 7.1 percent in October, making even lower targets possible.

The Shanghai announcement raises another possibility -- that Li will use the occasion to abolish GDP targeting at the national level completely.

The possibility still seems remote, but it could represent a major reform.

The official press has been sending mixed messages about the Shanghai precedent, praising it on the one hand while arguing against its application as a model on the other.

"Shanghai is wealthy and powerful enough to achieve the shift in focus," the Xinhua editorial said. "But it is impossible for many parts of the country to follow Shanghai's example given the unbalanced economic development."

The priority for underdeveloped western and central provinces is "how to catch up with their developed counterparts in the eastern region," it said.

Economic targeting

The government may have already signaled that it will not abandon economic targeting entirely.

On Jan. 27, a senior official of the Ministry of Industry and Information Technology (MIIT) said the agency had set a goal of 8 percent growth for industrial output in 2015, down from a target of 9.5 percent last year.

In 2014, industrial production missed the government's mark with growth of 8.3 percent.

Xinhua quoted the MIIT official as saying that the new target "took into account China's projected GDP growth this year," suggesting that the government has already set a GDP goal.

Gary Hufbauer said the government may be ready to set lower or softer targets without doing away with them completely.

"It would be really dramatic if they gave up on keeping growth of at least 5 or 6 percent," Hufbauer said.

"This has been their great achievement, the past growth over the last 30 years, and it would be unfortunate if they gave up that in pursuit of some other, much more nebulous goals," he said.





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