China is now shifting the focus of its economic policy from annual GDP growth targets to high-quality development, aiming at building a more sustainable economic model and becoming a high-income country by 2025. This story is part of our Beyond GDP series.
In October 2020, China’s ruling Communist Party published a proposal for its 14th five-year plan, which will guide the country’s national economic and social policy from 2021 to 2025. To the surprise of many China watchers, the proposal does not include a specific GDP growth target, although these targets have been one of China’s primary economic development goals over the past decades.
Instead, the proposal highlights a number of quality development goals, including increasing technological self-reliance, establishing a comprehensive social safety net, realising a significant green transformation in both production and the lives of citizens, enhancing the quality of employment, healthcare and education, and reducing inequality between urban and rural regions. It appears that China’s leadership intends to shift the country’s development focus from quantity to quality.
While dropping the annual GDP growth target is an unusual move for China’s five-year plan, many economists and Chinese policy insiders have long urged the Chinese government to take such a step in order to continue its economic progress.
“China should abandon quantitative growth targets because at China’s current stage of economic growth, focusing on quantitative targets only stalls economic development by giving wrong incentives to local governments and creating a huge amount of bad debt,” explains George Magnus, an independent economist and research associate at China Centre, Oxford University.
Since implementing free-market reforms in 1979, China has doubled its GDP every eight years, moving rapidly from a low-income to an upper middle-income country. But this explosive growth also has come with potential risks. The numerous debt-fueled infrastructure investments launched by local governments in China to meet the GDP growth targets have contributed significantly to the country’s surging debt. In 2019, China’s debt rose to more than 300% of GDP, which many experts see as a warning sign of a looming financial crisis.
An over-emphasis on GDP growth rates also leads to growth limitation over time. China has been relying significantly on low-cost labour and credits to drive its high-speed economic development, but an inevitable increase in wages will impact the country’s competitiveness in the global market.
“We have seen China’s labour and capital productivity growth decline steadily over the past years. There is no point in setting a growth target of six percent if the potential growth rate is only three percent,” says Magnus. “The key for China to overcome the foreseeable economic stagnation is to boost productivity and build a more sustainable economic model.”
The situation facing China is not unique. Most middle-income countries have used foreign technologies to produce labour-intensive, low-cost products in the early stages of economic development, but have later struggled to continuously generate high economic growth after losing competitiveness internationally because of increasing wages. Without major technological innovation, these countries are trapped in the middle-income status for decades. A World Bank report shows that of 101 middle-income economies in 1960, only 13 became high income by 2008.
China’s latest five-year plan does include the goal of crossing the high-income threshold by 2025 and doubling the size of the country’s economy by 2035. Magnus believes that these quantitative targets will be difficult to achieve without qualitative progress, such as increasing self-sufficiency in technology and enhancing capital efficiency. The Chinese government’s increasing emphasis on high-quality development seems to be in line with this view.
Besides trying to avoid the middle-income trap, the shift in China’s economic policy focus reflects other challenges that the country urgently needs to confront, ranging from pollution to food safety to social inequality. Widespread air and water pollution resulting from the country’s rapid industrialization have lowered the standard of living for many citizens and induced economic costs caused by related diseases.
According to a 2020 report from environmental advocacy group Greenpeace, air pollution from burning fossil fuel costs China USD 900 billion a year – the highest such cost borne by any country in the world.
China has already started to address these issues, implementing policies to reduce pollution and promote green energy. Torsten Weller, China policy analyst at the China-British Business Council, is optimistic about how the 14th five-year plan will continue and strengthen these efforts.
“We will probably see significant progress in green transformation, as it fits well with China’s traditional top-down regulatory approach. It also enjoys broad support by Chinese citizens and does not require major trade-offs,” he says.
The sharp increase of China’s middle-class population is one of the major motivations for the government to create a better living environment. The country’s middle class rose from one percent of the population in 2000 to 50.8% in 2018, and they are pressuring the government for higher standards of living.
“It is clear that the Chinese government now wants their citizens to consume better goods and services. The level of satisfaction among China’s middle class will be an important element for the government,” notes Weller.
A major challenge facing China in implementing its quality-centred policies is how to measure the results. Even though a number of indicators to assess quality of life beyond GDP exist, experts question if the Chinese government is willing to apply some of the metrics, in particular regarding wealth distribution, and if the data it collects are genuine. “Measuring indicators such as life satisfaction is more difficult, as it requires respondents to give honest answers,” explains Weller.
According to Magnus, another obstacle lies in the fact that many quality development targets the Chinese government plans to reach, such as enhancing labour productivity, reducing inequality and building a strong social security net, require deep political and economic reforms. “Chinese President Xi Jinping has been tightening the country’s centrally controlled ruling system since he took power in 2013, so it is yet to be seen whether China’s leadership will put pragmatism ahead of political ideology to achieve greater improvement in its people’s wellbeing,” he says.
Being the most powerful authoritarian state in history, together with its sheer size and highly ambitious goals, makes China a distinctive case to watch. The next five years will test if the new emphasis on high-quality development can help the country successfully make the leap to a high-income economy.
Want to go further beyond GDP? Read the other stories in our series.