Written by Michael Reilly.

For all but the most zealous economists and statisticians, the announcement by Shanghai’s Municipal Government this week that it is to abolish GDP growth targets was hardly the stuff of headlines. Pretty well everyone knows after all that the Chinese economy is motoring along nicely at around 7% annual growth. Even if national growth came in a decimal point or so short of the official target in 2014 it still seems a very heady performance to Europeans looking at stagnation, the more so after the better part of three decades of annual growth around double digit levels.

But the headline announcement is a revealing indication of both the tensions inherent in China’s economy and Xi Jinping’s determination to implement reform. On the surface, China’s growth figures do indeed look impressive. They are dutifully reiterated by international organisations from the IMF down, giving them added credibility. But increasingly, the official figures have raised more questions than answers. Collating reliable statistics in any country is a challenge. So the quarterly ‘flash’ estimates of GDP growth in OECD member countries are subject to regular revisions, sometimes for as much as eighteen months afterwards. Sometimes the revisions can be significant, as we have seen recently in the UK, with revisions to the 2014 Q3 figures. In China, not only are such revisions rare but more often than not growth comes in precisely on or slightly over the government’s pre-announced target. Another puzzle is that growth rates for the majority of provinces are almost invariably higher than the national average figure. Statistically this is impossible.

Chinese leaders are under no illusions about the credibility of the figures. Former Premier Wen Jiabao publicly suggested that figures for steel and cement output and electricity consumption were more reliable indicators of Chinese economic performance. So why are they so unreliable, and why is so much attention given to them?

The public adherence to targets is one of the last remaining vestiges of old-style Soviet central planning in China. Targets and quotas are regularly exceeded, with much attendant publicity even though little information is given about the original baseline – which can even be an official secret. This has had tragic consequences for Chinese in the past, most notably during the ‘Great Leap Forward’ when too many provinces published grossly exaggerated targets for grain output. Central government officials based their grain collection on the targets and millions starved as a result.  But the targets have remained until now, in large part reflecting the Party’s desire to be seen to be in full control of the country. Anything suggesting the targets were not being met would be unacceptable.

And again, until now, growth rates have been one of the key criteria on which officials’ performance has been evaluated. The idea may be logical – assess officials on their ability to deliver material improvement – but as recent experience in the UK with government mandated targets has shown, this can lead to unanticipated outcomes. If the key official in a province is assessed primarily on his province’s growth rate but the officials under him are assessed by him, then it is almost axiomatic that the provincial statisticians will record growth at the desired or agreed level. Hence the fallacy of national composition in the provincial growth figures. Furthermore, as history all too clearly shows, most topically in Venezuela, generating growth is not difficult. Generating sustainable growth is another matter. But in a system where an ambitious official will typically move on after three years or so, the emphasis has been on short-term growth, hence the attraction to officials of new roads, airports, civic buildings and industrial sites. It is their successors who have to handle the consequences of empty sites, bankrupt projects and a populace angry about land grabs or environmentally damaging development.

So against this background, Shanghai’s ditching of growth targets is a welcome further step in Xi Jinping’s reform and modernisation drive. Expect further announcements in similar vein at the National People’s Congress in March. And don’t be surprised if China’s 2015 growth rate is lower again than last year’s.

Michael Reilly is a non-resident Senior Fellow at the CPI, a former Director of the British Trade and Cultural office in Taipei and until recently the chief representative in China of a major international aerospace company.