China's plans for 2020: ambitious targets constrain economic policies
The Chinese Communist Party (CCP) wants China to reach ambitious economic goals before its 100th anniversary in 2021: both the economy and per capita income are to be doubled compared to 2010 levels by 2020.
Reaching these targets would symbolize China’s rise to prosperity and enhance the legitimacy of the Party. These targets have their roots in Deng Xiaoping’s vision of a “moderately prosperous society” and were officially adopted in Party documents under Xi Jinping, including the 13th five-year plan. The ambitious targets carry major political weight within the Communist Party. Their importance for a legacy-minded leader such as Xi should not be underestimated.
We expect that these economic targets will take priority over solving many other urgent issues such as China’s growing debt problem, industrial overcapacities, asset bubbles and environmental pollution. Seriously addressing these issues would negatively affect economic growth, which we believe is not acceptable to the CCP under Xi.
The political significance of the targets will place constraints on what will be an acceptable bottom line for economic growth over the next three years. For this reason, we believe that the Chinese leadership will not tolerate a drop of GDP growth between 2018 and 2020 below an average of 6.4 percent. Maintaining average GDP growth at this level will ensure a smooth shift to lower levels of economic growth. This allows for some leeway in structural reforms, but the advances are likely to be timid.
To assess whether the 2020 targets are achievable we did a series of calculations. With the economy expanding by 6.4 percent on average our analysis indicates that the targets can only be partially met. Out of the two economic targets – the GDP target and the income target – only the doubling of real GDP is a hard target. It is precisely defined in official documents and is of utmost political importance to the CCP. In the 13th five-year plan, a GDP growth target of no less than 6.5 percent was set to ensure that the 2020 GDP target would be met. But because recent growth has beat expectations, growth of 6.4 percent annually over next three years will be sufficient to reach the target. This appears within reach.
At that level of GDP growth, however, reaching the income targets will be more difficult if not impossible. Compared to the GDP target, official documents define income more vaguely. Income could either refer to GDP per capita or to disposable household income. Adding to the uncertainty, the documents do not clarify whether the indicators should be adjusted for inflation. This leaves ample room for interpretation – and it gives the government some flexibility when they to no one’s surprise announce the goals have been met.
But, for income to double in anything but name, the real indicators, i.e. adjusted for inflation, would have to double. Official party documents refer to the doubling of both rural and urban income. But official GDP per capita statistics make no distinction between the two. Therefore, we assume disposable income is a more realistic benchmark than GDP per capita. But, to be thorough, we have calculated the economic growth required to double both GDP per capita and disposable income.
Adjusted for inflation, only the doubling of rural disposable income is achievable. Our calculations indicate 4.4 percent annual growth would be sufficient to reach the target. Considering that average rural income growth in the past five years reached 8.6 percent, this seems like a given. Achieving the target in cities will be more difficult: urban disposable income growth would have to accelerate to 7 percent annually in real terms. Based on our calculations, this would require the overall economy to grow at 8.4 percent annually.
The doubling of GDP per capita is equally challenging. To reach this goal, the GDP per capita would need to grow by 7.4 percent annually over the coming years. Assuming that the population grows at roughly the same pace as in the past five years and that economic growth reaches 6.8 percent in 2017, GDP would have to grow at 8.2 percent annually between 2018 and 2020. A return to such high growth rates is unlikely.
The doubling of GDP will be met, but the doubling of real income is likely impossible. The vague definition of the income target provides an escape for the leadership to proclaim success, for example by focusing on nominal targets. The income target is also more likely to be forgone as long as citizens remain confident in the economy. This leads us to believe that the doubling of income is a soft target which will not be pursued it at all costs.
Despite this flexibility the commitment to doubling GDP lodges the Chinese leadership between a rock and a hard place. Maintaining average GDP growth of 6.4 percent until 2020 leaves little room to address long-term problems such as environmental destruction, asset bubbles and credit growth. Defending the politically motivated targets will require keeping stimulus measures in place while slowing reforms. Postponing structural reforms for the sake of creating a seemingly pleasant economic environment for the CCP’s upcoming 100-year anniversary may end up in a big hangover following 2021.