China’s GDP growth targets should be scrapped to help put cap on local government debt, top central bank adviser says

Amanda Lee
·4-min read

China should permanently stop setting annual economic growth targets, as its overall level of borrowing and debt is rising at the fastest rate since 2009, following the global financial crisis, according to a senior adviser to the country’s central bank.

Ma Jun, a member of the monetary policy committee of the People’s Bank of China (PBOC) and its former chief economist, has outlined a number of risks facing the Chinese economy. He warned that continuing to set gross domestic product (GDP) targets may worsen the debt risks among local governments, which could increase their already high borrowing levels as they try to meet unrealistic growth goals.

Instead, Beijing should focus on stabilising employment and controlling inflation as its main macroeconomic policy goals, Ma said, according to a transcript of his remarks published on Monday on media site It was unclear when exactly his comments were made.

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The world’s second-largest economy grew 2.3 per cent in 2020, after Beijing opted in May not to set an annual GDP growth target for the first time since 1990 due to the fallout from the coronavirus pandemic.

Ma said that while the government should use GDP forecasts in fiscal and investment planning, they should not be used as “an indicator for evaluating the performance of local government officials”.

China debt: local government default risk grows as authorities struggle to repay credit

“By emphasising GDP assessments, it is inevitable that some locals will falsely report the rate of economic growth,” he said, adding that many local officials often turn to borrowing to lift GDP growth, adding more debt even as their revenues continue to decline.

Last year, Beijing rolled out a flurry of stimulus measures to revive the economy, including increasing the issuance of local government special-purpose bonds to fund infrastructure projects, lowering lending rates, cutting taxes and lifting the budget deficit ratio to 3.6 per cent of gross domestic product (GDP) to allow for more government spending.

However, such measures also drove up overall government debt as a percentage of GDP – the leverage ratio – leading to concerns of greater default risks among local governments, their investment projects, and the state-owned enterprises they controlled.

“We are now facing a paradox,” Ma said. “On the one hand, the leverage ratio has risen very fast, requiring monetary policy adjustments. In the first three quarters of 2020, the country’s macro leverage ratio increased by 25 per cent, the largest increase since 2009. A [further] substantial rise in leverage will naturally lead to future financial risks.”

Ma said that the financial positions of local governments deteriorated last year, especially in central and northeast regions, while small banks – much of whose lending is to the small and micro enterprises hit hardest by the pandemic – are seeing their asset quality declining as the default risk of their borrowers grows.

“The other [risk] is the case of bond defaults,” Ma added. “Although it should be emphasised that we cannot avoid debt, some local governments and companies just can’t cover them any more.

“These are all downside risks to be concerned about.”

A resurgence of new Covid-19 infections in China and the uncertainty surrounding the spread of the virus in the rest of the world could hamper China’s foreign trade, investment and technological exchange with other countries, and this would have an intermittent impact on the Chinese economy, he said.

Ma suggested that Beijing consider relaxing some controls on capital outflows to alleviate the upwards pressure on the yuan exchange rate, to prevent it from becoming too strong, which would hurt China’s exports. Last year, the yuan gained more than 6 per cent against the US dollar.

Ma also expressed some optimism over the new presidential administration in the United States, listing it as the main potential upside opportunity for the Chinese economy this year, as President Joe Biden is likely to seek ways to work with China on the issues of climate change, public health and nuclear arms control.

“In addition, there may be opportunities for the tension in China-US trade to ease in some areas,” Ma added.

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