Legacy of toil

Hu throws down gauntlet with Chinese GDP target

Hu Jintao has left China’s next leader a parting gift: a new financial target. The outgoing head of the Communist Party told delegates to its five-yearly party conference that the country should double GDP per head in both rural and urban areas from 2010 to 2020. That’s only achievable if the next generation make changes Hu and his colleagues shied away from.

China already has a bit of a head start: GDP expanded by 9.2 per cent in real terms in 2011, and is likely to rise by 7.5 per cent in 2012. If the population expands by three per cent over the current decade as the United Nations predicts, GDP per head would need to grow by 7.3 per cent a year from here on in to meet Hu’s target. That’s a moveable feast, of course. Were China to relax its one child policy, the population could expand faster, calling for speedier overall growth. Splitting out both rural and urban populations also means that growth must be more equally spread.

To see how realistic that is, think about GDP growth as the sum of three things. One is the addition of labour, which should contribute 0.1 per cent to GDP growth a year, according to a BNP Paribas analysis. Growth in capital should add another 3.2 per cent a year. That leaves around four per cent annually to come from other factors, like better allocation of capital, or improved use of technology. That’s more than the 3.9 per cent a year China added from 1979 to 2008, by BNPP’s reckoning.

To achieve that, Hu’s successor Xi Jinping will need to address some of the omissions of the last decade. Shaking up the banking system to make sure that credit is distributed more efficiently would create economic gains.

So, would depriving state-owned enterprises of cheap lending, and breaking up oligopolies that discourage capital discipline. Agriculture too remains inefficient. If tough targets encourage Xi to finally tackle these problems, Hu’s GDP goal is a gift worth having.