What the "Around 5%" growth target means

Xi Jinping, Paramount Leader of China, has often criticized the focus on growth rates, emphasizing 'quality growth' over a headline number, and this is a good point certainly.

Still, the government is deeply committed to their process: Growth is targeted and achieved. This decision to aim for "around 5%" is not an economic forecast but rather a promise of sorts. The government is saying that they will step in to drive growth, or perhaps we should call it 'growth'.

Seemingly it doesn't matter that China's workforce is shrinking, which should lead to reductions in GDP unless continued efficiency gains can outweigh the effects of a lower number of productive workers. Nor does it matter that the real estate market is due, indeed is desperate, for a significant correction.

Such a correction would lead to a recession, and a recession is apparently not politically acceptable. But how long can politics restrain economic forces?

Already the banks are being swept into line: They will lend when they are told to, regardless of the underlying economics. They will make investment products out of bad loans, because why not. Anything but write-offs, which turn into losses, which hurts GDP growth, which make things look bad.

This run-down from Cheng Leng and Sun Yu for Financial Times really gets at the cruxes (plural) of the debate, it's an excellent piece of work. Should loans be extended to 'complete' unfinished apartments? Is throwing good money after bad a wise decision? I've resigned myself to that possibility, but it is also quite possible that, even as the leadership says the apartments will be finished, the banks may not be lending for that purpose.

And why should they? Doesn't it become just a slush fund for the developers? These are zombie companies that have no particular capability anymore, just stacks of losses and a few employees standing around, hoping somehow it will work out in their favor. For every dollar that goes in, much less than one dollar of productivity will come out. An economic black hole that requires significant resources to restart the machinery.

It is becoming clear that China should create a national clearinghouse for these properties, the issue is too big to deal with otherwise. The job requires focused attention to the real economic value of the distressed properties and a sharp assessment of what can and cannot be viable, along with plans to compensate investors, at least to some extent.

The piece highlights the economic discussions, and then reminds us of the environment where this is all taking place:

The PBoC has also been subject to a years-long anti-corruption campaign

Which makes it all a lot more fun, I'm sure.

The decision to pin this number for 2024 is intended as displaying strength to domestic and global markets. The danger, of course, is that the target cannot be obtained. In general that's a solvable problem with a little creative accounting and a lot of government outlays, with debatable long-term economic value.

“Stability is of overall importance, as it is the basis for everything we do,” Li said during the delivery of his maiden work report.

The Party rationalizes all of its actions on 'stability', and yet instability is the watchword of the year. Consider what will happen as the year continues, if significant new growth is not apparent.

On the consumer side losses will definitely not be apparent. Those that lost their investments in shadow banks and those that bought houses that are unfinished and will not be delivered will not get to declare their losses, same for corporations that invested in either. Although that process would be quite a good method of reaching a solution here.

Looking to expectations for 2024, I'd just note that China's draconian system just expelled about 9 million productive people from their system:

Chinese authorities have blacklisted 8.57 million people who missed payments on everything from home mortgages to business loans, according to court data. The cumulative figure is up 50% from the 5.7 million defaulters at the beginning of 2020

More on this here. These measures will reduce the debtors' ability to be economically productive or to spend for that matter, and I assume their numbers will continue to rise.

Finally it is also important to remember that China has another group of people forced outside the system, the second children who weren't killed but also weren't allowed to be registered. No ID card at all. Link from 2015.