China: Goodbye to “GDP Worship?”

For years the Chinese government has set annual GDP targets and often met or even exceeded them. But we still haven’t heard from the government this time around and now investors are wondering if it’s a sign that China’s growth is headed further south.

China’s GDP came in at 7.8% for Q3 2013, up from Q2 2013’s 7.5% figure. The economy would have to grow by less than 7% (which is unlikely) for it to miss the government’s 7.5% target for 2013.

Before you buy the yuan like there’s no tomorrow though, you should know that a 7.5% growth would still mark the slowest growth since 1999. This isn’t exactly good news for China, whose growth momentum has been slowing since 2010.

China’s growth rate story isn’t exactly a fairy tale to begin with. Just last year the government was criticized for its “GDP worship” or the practice of treating growth rates as bottom lines rather than targets to aim for. In fact, word on the hood is that successes of local officials were in some way tied to their growth rates.

Not surprisingly, the model encouraged more than a few economic imbalances. Remember that one of the easiest ways to boost GDP is through government spending. This is probably why local government debt clocked in at $3 trillion by the end of June 2013, up by 63% since the end of 2010. China’s economy had only grown by 40% in the same time period.

Xu Shaoshi, minister of the National Development and Reform Commission, was quoted saying that financial risks had also resulted from the government’s activities. See, public infrastructure projects, a key contributor to China’s recent growth, usually only generate minimal returns.

The investment-focused drive had also encouraged excess capacity. Industries such as cement, steel, aluminum, and shipbuilding are experiencing overcapacity while service industries have yet to realize their full capacity. Heck, the PMI for the service sector, a key measure of business activity in the services sector, had already fallen to its four-month low at 54.6 in December, as most industries failed to find new growth engines amid slowing exports.

The government isn’t blind and deaf to its criticisms though. In their 2013 plenum officials had already hinted that China’s future growth will be less investment-based and more consumption-driven. The government will probably have to spend less on infrastructure and businesses and more on social services such as education, social security, and health care to achieve this goal.