Don't Be Fooled by China's Growth Forecast
The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
Exhibit 1: China Target vs. Real GDP Growth Rates
Sources: Central People's Government of the People's Republic of China, IMF; as of 03/05/2012. IMF estimated growth rates are based on constant 1990 prices in Chinese yuan.
NEW YORK ( TheStreet) -- Chinese officials caused quite a stir when they lowered their 2012 economic growth target to 7.5%. Many already fretted a Chinese hard landing in 2012, and if Chinese growth were indeed to match the target, it would be the slowest expansion since 1990. However, recent history suggests Chinese growth should exceed those low expectations.
Historically, China's official growth target has been the lower bound of a range -- an easily attainable threshold they can boast of beating at year-end (under promise, over deliver, as the saw goes). As shown in Exhibit 1, real Chinese GDP growth has handily trounced the target every year since 2000 (the earliest official data available), nearly doubling it in 2007. In 2004, the last time China forecast 7.5% growth, GDP grew a robust 10.1%. That's not to say 2012 will match that pace, but growth on par with recent years seems plausible.
Even if China's growth rate slows somewhat in percentage terms, it would likely still increase in dollar terms, given the lower percentage rate that would apply to a significantly higher base. Exhibit 2 plots China's annual percentage and dollar GDP growth from 1984 through 2011 and the IMF's forecasts for each from 2012 to 2016. Over the past five years, as the growth rate ranged from 9.2% to 14.2%, China's GDP grew by roughly $2.8 trillion. IMF growth forecasts through 2016 are a bit slower than recent years', but that would still yield an additional $4.1 trillion in GDP -- the highest five-year increase China has ever seen.Exhibit 2: Chinese Annual GDP Growth, Percentage vs. Dollars
Sources: Thomson Reuters, IMF; as of 03/05/2012. Dollar GDP growth is measured in 2011 dollars, with the current exchange rate held constant. As we've written, 2012 is a Chinese "election" year -- citizens elect new local leaders (China having a one-party system, they choose between communists and communists), and the party elite select the new president and premier. Planned transitions have the potential to sow dissent --the party factions passed over for promotion could launch a power struggle, and civil unrest could erupt. Careful economic management can mitigate these risks, though. If growth is robust and inflation under control, citizens are likely to be a lot more content, top to bottom. Also, despite 35-plus years of liberalization, China's is a command economy, so officials can use available throttles to manipulate the economy fairly well to suit their aims. Last year they reined in inflation (which required allowing growth to slow), likely setting the stage for a planned acceleration during the transition -- matching what China's done during prior power transitions.
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