It was in that spirit that I posed my question to Lou, whom I have known since the late 1990s. In that period, he has been Deputy Minister of Finance, founding Chairman of Chinas sovereign wealth fund, China Investment Corporation, and now Minister of Finance. I have always found him to be direct, intellectually curious, a first-rate analytical thinker, and a forward-looking advocate of market-based reforms. He is cut from the same cloth as his mentor, Zhu.
My question was set in the context of the new thrust of Chinese reforms announced at last Novembers Third Plenum of the 18th Central Committee of the Chinese Communist Party, which emphasised the decisive role of market forces in shaping the next phase of Chinas economic development.
I prefaced my question by underscoring the inherent contradiction between a target and a forecast in framing Chinas major economic objectives. I argued that the former embodied the obsolete straitjacket of central planning, while the latter was far more consistent with market-based outcomes. A target perpetuates the image of the all-powerful state-directed Chinese growth machine a government that will essentially stop at nothing to hit a predetermined number.
While it may seem like splitting hairs, continuing to frame the economic goal as a target sends a message of determined and explicit guidance that now seems at odds with the governments market-oriented intentions. Wouldnt dropping the concept send a far more powerful message Isnt it time for China to let go of the last vestiges of its centrally planned past
Lous response: Good question.
China, he went on, is in fact moving away from its once single-minded emphasis on growth targeting. The government now stresses three macroeconomic goalsjob creation, price stability, and GDP growth. And, as evidenced by the annual work report that the premier recently submitted to Chinas National Peoples Congress, the current emphasis is in that order, with GDP growth at the bottom of the list.
This gives China and its policymakers considerable room for manoeuvre in coping with the current growth slowdown. Unlike most Western observers, who are fixated on the slightest deviation from the official growth target, Chinese officials are actually far more open-minded. They care less about GDP growth per se and more about the labour content of the gains in output.
This is particularly relevant in light of the important threshold that has now been reached by the structural transformation of the Chinese economythe long-awaited shift to a services-led growth dynamic. Services, which now account for the largest share of the economy, require close to 30% more jobs per unit of output than the manufacturing and construction sectors combined. In an increasingly services-led, labour-intensive economy, Chinas economic managers can afford to be more relaxed about a GDP slowdown.
Last year was a case in point. At the start of 2013, the government announced that it was targeting ten million new urban jobs. In fact, the economy added 13.1 million workerseven though GDP expanded by only 7.7%. In other words, if China can hit its employment goal with 7.5% GDP growth, there is no reason for its policymakers to panic and roll out the heavy counter-cyclical artillery. That, in fact, was pretty much the message conveyed by a broad cross-section of senior officials at this years CDF: Slowdown, yes; major policy response, no.
Zhou Xiaochuan, the head of the Peoples Bank of China, was just as emphatic on this point. The PBOC, he argued, does not pursue a single target. Instead, it frames monetary policy in accordance with what he called a multi-objective function comprised of goals for price stability, employment, GDP growth, and the external balance-of-paymentsthe latter factor added to recognise the PBOCs authority over currency policy.
The trick, Zhou stressed, is to assign weights to each of the four goals in the multi-objective policy function. He conceded that the weighting problem has now been seriously complicated by the new need to pay greater attention to financial stability.
All of this paints China with a very different brush than was used during the first 30 years of its growth miracle. Since Deng Xiaopings reforms of the early 1980s, less and less attention has been paid to the numerical targets of central planning. The State Planning Commission evolved into the National Development and Reform Commission (NDRC) though it is still housed in the same building on Yuetan Street in Beijing. And, over time, economic managers succeeded in drastically curtailing sector-by-sector Soviet-style planning. But there was still a plan and an aggregate growth targetand an all-powerful NDRC hanging on to the levers of control.
Those days are now over. A new leading committee on reforms is marginalising the NDRC, and Chinas most senior fiscal and monetary policymakersLou Jiwei and Zhou Xiaochuanare close to taking the final step in the long journey to a market-based economy. Their shared interpretation of flexible growth targeting puts them basically in the same camp as policymakers in most of the developed world. The plan is now a goal-setting exercise. From now on, fluctuations in the Chinese economy, and the policy responses that those fluctuations imply, need to be considered in that vein.
Roach, a faculty member at Yale
University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China
Copyright: Project Syndicate, 2014.