Some positives leading up to the National People’s Congress

Beijing seems to be serious about moving away from wasteful investment used to fuel short-term economic growth, and in time perhaps also the entire practice of setting GDP growth targets

There is growing evidence which suggests that Chinese policymakers are taking real steps to move away from their long-favoured investment-led growth model, even if it has a negative impact on economic growth in the short term. This is made possible partly through increased centralisation of power, and is arguably a development that is not receiving as much attention as it should.

No more vanity projects

Besides the decline in property investment – engineered by the central government – Beijing has over the last few months restricted heavily indebted local governments from borrowing, blocked infrastructure projects, told local officials they need to learn how to live frugally and publicly shamed those who have wasted funds on vanity projects. And with the Central Financial Commission (CFC), which was established late last year to improve work around financial stability and development, now taking over distributional responsibilities from the Ministry of Finance, it is not unlikely that financial transfers to local governments will come with strings attached going forward. This represents an important break from the old arrangement in which Beijing largely did not meddle in what local officials spent their funds on as long as they met their GDP growth targets and other KPIs.

To ensure that local officials are following the central government’s guidelines, the CCP’s Central Committee released in late February a revised set of regulations on disciplinary inspection work. Notably, the new top priority for inspectors is to ensure implementation “…of major decisions and arrangements of the party’s Central Committee, especially the implementation of General Secretary Xi Jinping’s important speeches and important instructions”.  The CFC has over the last few months also set up offices in more than 20 provincial-level regions in part to supervise local government finances.

Emancipating the mind

These are probably necessary steps as local officials will resist because they stand to lose the most from the economic adjustment – mainly through diminished economic and political power. Many are also forced to take pay cuts, which is not popular. At the same time, there are some who seem to be embracing the changes. Shen Xiaoming, Hunan’s Party Secretary, recently launched a campaign to “emancipate” the minds of local leaders – a concept brought up by Xi with increased frequency and first introduced to break from the past and support economic reforms after Mao’s death.

While some analysts have argued that the campaign will not have a meaningful impact, it shouldn’t be disregarded because ultimately it is local officials who will need to implement Xi’s policies. Of course, words need to be turned into action, but Shen is hitting all the right notes when he says that Hunan will:

-  Shift away from the simplistic glorification of GDP growth rates

-  Overcome the reluctance to change development methods and the unwillingness to endure the pains of transformation

-  Reverse the dependency on risky debt accumulation and reckless expansion that disregards risks

-  Abandon the extensive economic development model that relies solely on the input of resources and capital

-  Reject the utilitarian tendency of seeking temporary hype rather than long-term welfare for the community

End of an era in sight

For Beijing to properly break from the past and deliver on Xi’s promises of high quality and sustainable development, it needs amongst other things to end the practice of setting GDP growth targets that are much higher than what the real productive forces of the economy – household consumption, business investment and net exports – can deliver. Until this happens, there will be more wasteful investment and a rise in debt that will be difficult for local governments to service. While ending this practice probably will not happen this year, the ongoing efforts to scale down unproductive investment – combined with Hunan’s campaign – indicates that we are moving towards a “post GDP growth target era”.