China’s economy grew 7.7% in 2013 because Beijing got nervous and started juicing

China's Transition
China's Transition

China is the only major economy in the world to set a hard target for economic growth, and the latest GDP figures released today show precisely why it’s a bad idea.

Fueled by a huge surge in government “mini-stimulus” lending in the second half of the year, China’s GDP increased by a higher-than-expected 7.7% for 2013 (link in Chinese) according to the National Bureau of Statistics. That might sound like a good thing, but it’s not: essentially the government freaked out at the prospect of missing its 7.5% target, and overshot the mark.

The consequences—especially for China’s attempts to reform its economy and limit the amount of debt that its businesses and local governments are taking on—could be ugly.

Here’s a look at how 2013 stacked up:

What does this mean for 2014? First off, the quarterly data that the NBS releases suggests that the government will need to juice the economy again if it’s to hold steady at the current rate.

China records its GDP by comparing it with the previous year and adjusting that for inflation. However, the way that most major economies measure growth—by comparing output against the previous quarter, adjusting it for seasonality and projecting what annual growth would look like at that rate—captures growth momentum more effectively. Here’s what that looks like:

As you can see, momentum slowed somewhat in Q4, as the effects of the stimulus wore off and, possibly, as lending hit a seasonal lull in December. “Growth momentum is clearly weakening,” Credit Agricole analyst Dariusz Kowalczyk told Bloomberg. “The slowdown became increasingly clear as the quarter progressed.”

In order to make sure this year’s growth comes in anywhere close to 2013 target, the government will need to roll out a new stimulus and keep credit growth booming. That encourages businesses to pile on more debt—which is really dangerous for a country that’s already shelling out 39% of its GDP to pay off interest on existing debts.

Because of the distortions created by stimulus spending, many economists believe China’s investment is increasingly flowing into projects—or even worse, into real estate—that aren’t profitable. The cost of creating overcapacity is slower growth in the future. The government might not allow a much lower rate of GDP growth in 2014 (we’ll have to wait until the government holds its big annual meeting in March to find out what this year’s target is). But it has to happen eventually—and the sooner, the better.

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