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How the 'Power of 8' hurts China


How the 'Power of 8' is hurting China

Venkatesan Vembu
DNA Read the World

In the Chinese numerological belief system, the number ‘8’ (ba) is considered ji li (auspicious), in large part because it sounds like the Chinese word for ‘wealth’ (fa). The superstitious association runs deep, and automobile licence plates and telephone numbers with a preponderance of the ‘lucky 8’ in them command astronomical valuations in China. Even Communist Party leaders are evidently in thrall of it: the inaugural ceremony of last year’s Beijing Olympics, for instance, was timed precisely for 8 minutes past 8 pm on August 8, 2008 (8/8/08).
 
Even economic policymakers in China appear fixated on the number 8. (There’s a likely historical explanation for this: see footnote below.) This year’s GDP growth target, for instance, is 8% - which, when the target was set in the middle of the global economic downturn, seemed improbably high since China’s exports, principally to the US and Europe, fell off a cliff following the collapse of consumer demand in those economies. But on the strength of China’s 4-trillion-yuan stimulus package and an avalanche of lending by commercial banks, that 8% target will, it appears, be comfortably met for the full year, going by the 7.9% GDP growth during the second quarter of 2009.
 
(Some economists wonder if China is “faking its economic recovery, which reflects long-standing concerns about the authenticity of official data from China – as reflected here - but that’s another story….)
 
Increasingly, however, economists are concerned that an excessive preoccupation with “bao ba” (“protecting 8”) is spawning structural distortions in the Chinese economy. Earlier this week, I interviewed RBS chief China economist Ben Simpfendorfer (published here), who argues that “it’s time to get rid of the growth target” since it is hurting China:
 
“(The 8% GDP growth target) places a burden on officials … If the economy is weaker than they expect, they try to prop it up by relying too much on just a few drivers, in particular, public investment and private residential investment. So it's time to get rid of the growth target and instead accept that growth will be weaker for a period. That provides an opportunity to reform the economy.
 
I think too much attention is paid to the pace of growth rather than the quality of growth. The economy is overly reliant on government investment and private residential investment, and these two growth drivers are unsustainable over the medium term. The greatest weakness in the economy is the ongoing contraction in private business investment -- spending on factories and machinery equipment.”
 
Simpfendorfer, who speaks fluent Chinese (and Arabic! - I’ll write more on that on another occasion), also offers anecdotal evidence to establish that the record growth in commercial banks’ lending in the first half of this year is feeding distortions:
 
A large property developer has reportedly purchased 40,000 tonnes of nickel -- in part to speculate (on commodity prices). You hear other examples of corporates borrowing through short-term bills and depositing the money back with banks in order to try and arbitrage the difference between the short-term bills rates, which are set by the market, and the short-term deposit rates, which are set by the central bank.”
 
Simpfendorfer has some thoughts on the kind of structural reforms that China needs: you can read about it here
 
Footnote
China economy watchers frequently claim that the country’s GDP needs to grow at 8% in order to avert widespread social unrest. But there appears little by way of rational explanation to account for that number. I asked Simpfendorfer for a likely explanation for the Chinese obsession with an 8% growth target. He said:
 
It was used in the late 1990s, when growth slowed, and they had a policy of "protecting eight" ("bao ba"). I don't think it is especially scientific. I do worry that they've rolled out the same policy again 10 years later in spite of the fact that the composition of growth has changed significantly.”
 
There are other accounts of how this fixation with 8% came about. One account has it that in 1982, the then Supreme Leader Deng Xiaoping determined – somewhat whimsically – that he wanted to see China’s GDP quadruple by 2000. He reportedly asked the then Communist Party general secretary Hu Yaobang how that economic “Great Leap Forward” could be achieved, to which Hu said that it could be done if the economy grew at 8% a year. (Which just goes to show that Hu Yaobang was well-versed in the Power of Compounding  and, in particular, the Rule of 72!) That number perhaps remains burnished in Chinese officials’ minds as an unwavering target.
 
Source 

http://www.dnaindia.com/blogs/post.php?postid=210