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.
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.
Mr Gao highlighted a similar mismatch between China’s growth and its retail sales, which used to expand faster than GDP, but have underperformed it more recently. Retail spending has been particularly weak in provinces with fewer elderly people. In China, paradoxically, the most youthful provinces seem the least dynamic. The country is “full of vibrant old people, lifeless young people and middle-aged people who have lost hope”, he said.
What explains their gloom? One answer is the country’s property slump. Yet Mr Gao suspects that weak retail spending and lacklustre home purchases reflect something deeper: doubts about future job prospects. In China’s cities employment has grown more slowly than its pre-pandemic trend. The cumulative shortfall from 2021 to 2023 amounts to 47m jobs, he calculates, or about 10% of urban employment. Such an undershoot casts further doubt on China’s GDP data: if employment is one-tenth below trend, perhaps true GDP is 10% below the official figure.
Mr Gao’s talk was widely circulated online, then swiftly censored. But just because the government suppressed it does not mean it is true. Amid all the fuss, some of Mr Gao’s claims were misreported. Others remain poorly understood.
Start with the 47m missing jobs. This finding has been wrongly interpreted as 47m extra unemployed people. In fact, many of these missing urban workers, Mr Gao was careful to point out, either stopped looking for work (in which case they do not technically count as unemployed) or left cities in search of jobs elsewhere. Rural employment, Mr Gao calculates, has exceeded its historical trend by over 41m across the same three-year period.
Farm out
Moreover, the 47m figure seems to yoke together a shortfall in 2021 (of 5m), 2022 (22m) and 2023 (20m). Mr Gao perhaps has in mind a measure more akin to man-hours or “person-years” than urban employment. If a ten-person firm loses an employee to sickness for two years, it has lost two person-years, but it is still only a man down. Similarly, cities lost 47m person-years of work from 2021 to 2023, but as of last year, there were only 20m people down. Assuming workers found rural jobs, operating at a quarter of urban productivity, the hit to GDP in 2023 would be about 2.5%, not 10%.
The broken relationship between inflation and output is also not proof that GDP is wildly miscalculated. In theory, when growth is close to the speed limit, inflation should not be falling, but it can still be low. And in practice, links of this kind can be treacherous. After Japan’s central bank loosened policy in 2013, the output gap vanished, even as prices stayed flat. The central bank blamed “a deflationary mindset” and stubbornly low price expectations. Thus soft prices may reflect the same subdued view of the future that Mr Gao sees at work elsewhere in China’s economy.
Mr Gao’s speech clearly upset Chinese officials, who do not want incisive commentary to further undermine the public’s morale. But the party’s recent promise of loose, proactive and vigorous policy suggests they broadly share Mr Gao’s prescriptions. Policymakers, he said, have more work to do to stimulate the economy by easing monetary policy, expanding government borrowing and bolstering financial institutions. Analysts can have doubts about how fast China’s economy is truly growing, and still feel sure that growth should be faster.
Subscribers to The Economist can sign up to our new Opinion newsletter, which brings together the best of our leaders, columns, guest essays and reader correspondence.
