China’s leaders have long made a habit of under promising on growth while over delivering. In the double-digit growth decades, GDP growth usually came in, surprise, surprise, handily above the official target rate.
Even as the process of decelerating growth to a more sustainable pace has taken hold over the past few years, official targets have been set at lower than likely outcomes. The current prolonged slowdown of the global economy allied to the willingness of the new leadership to push ahead with necessary structural reform (“rebalancing”) of the economy even at the expense of propping up GDP growth requires expectations and targets to be lowered yet again.
The immediate timing of finance minister Lou Jiwei’s comments in Washington that Beijing may be willing to tolerate economic growth in the second half of the this year of less than 7% may be driven by the imminence of the release of the second-quarter GDP figures on July 15; these are expected to show a further slowing from the first-quarter’s 7.7%. But they fit into a pattern of statements from senior officials that seek to send a domestic message that slowing growth is part of the Party’s management of the economy to take China to the necessary next phase of its development.
At the same time, the country’s economic managers have to ensure that slowing growth doesn’t generate social unrest that could pose a challenge to the Party’s political authority. This process of expectations setting is well underway. Seven percent is the target annual growth rate across the current (2011-15) five-year plan, don’t forget, even if 7.5% is the target for this year (which implies a contingency allowance for some sub-7% growth years ahead).
It is an exercise in managing a soft landing as opposed to a hard crash. The immediate threat of slowing growth to stability would be a spike in unemployment leading to social unrest. Yet, remember, too, how for years, 8% GDP growth was held to be the magic number below with growth couldn’t be allowed to fall or society would collapse in mass unemployment. Yet the growth rate has slipped below 8% without those dire consequences coming true.
The bigger risk to stability (as Beijing is well aware) is the consequences of over-investment and the huge expansion of the shadow banking system blowing up. It will take the rebalancing structural reforms to defuse those threats. They, in turn, will take time to put in place.
Beijing, meanwhile, has a nuanced message to deliver. For decades a simple GDP growth number — the higher the better, but always met if you didn’t peer too closely under the hood — was how it communicated that it was delivering the increasing living standards for all Chinese on which the legitimacy of its monopoly on power rested. Now it has to emphasize that the quality of growth is more important than the quantity. Less is more will be a new experience for a couple of generations — of citizens, officials and investors — which have only known more to be more.