Using Gdp as Kpi in China

Group Case Assignment 1

Part I: Using GDP as KPI in China

Q.1

The inefficient resource allocation arose from too emphasis on short-term GDP growth but scarifying long term goals. Since official’s terms of office are normally five years, there was time lag in short term macroeconomic policy as time consistency or dynamic inconsistency. Shortcoming in the policy would impact long term growth after officials’ terms.

Noticeable examples can be drawn from overcapacity. China faces a high probability of being the next major power to face an economic collapse and is now at a tipping point. One major reason is industrial overcapacity. It is not new in China, but in sectors such as iron and steel, glass, cement, aluminium, solar panel, and power generation equipment, the overcapacity rate has recently surpassed 30 per cent, the threshold at which overproduction may trigger loan defaults by companies that have borrowed and then watched their profits fall.

Production has run rampant because of vicious competition between local governments. In order to achieve high GDP growth, local governments attract new manufacturing facilities by offering all kinds of financial subsidies such as tax holidays and rent-free use of government land.

Further, local governments help firms to get cheap loans from state-owned banks. These favours unnaturally decrease production costs. Overcapacity led companies to takes on debts to repay loans.

Risk factors also included debt-fueled spending on different types of capital investments. Inefficient government infrastructure projects such as airports, subways and intercity highways were invested in addition to high-speed rail network. Poor screening and monitoring of enterprises by banks to boost GDP was attributable to overinvestment in private sectors. The investments partly turned out real estate bubbles in some part of the country, like ghost city. Declines in both productivity and investment efficiency are in worry. The growth rate of GDP reached the peak at 11.2% during 2006 to 2010 when facing global financial turmoil. Those have resulted in mountain of debt, particularly in the corporate sectors, and massive, chronic industrial and manufacturing overcapacity. Furthermore, using GDP as a sole KPI led to focus on industrial production that neglected corresponding environmental challenges, for example, poisonous smog that Beijing is confronting.

Q.2

To achieve better career path and associated power, most of the Chinese Politicians will do anything for better KPI results.   Their decisions highly reply on the KPI.   In case GDP is not being used as KPI for the Chinese Politicians, the short-term problem is that Chinese Politicians will pay less attention to the GDP which results in affecting the GDP value and its components.   One of the most affected is the government expenditure and investment.    Politicians may reduce infrastructure and investment on public affairs because they are no longer help on the KPI.    Similarly, politicians have no tendency in stimulating corporation investments, customer consumptions as well as net export trading.   The GDP and other economic measurements will be gradually affected and dropped.   Global independent reports may lower the valuation on China’s future economy.

On the other hand, Chinese Politicians will likely focus on the new KPI factors which may not related to the economic growth.  They may take their own benefits instead of the holistic view of economic growth in China.    In long run, there is potential of economic downturn because politicians focus on short term reward and their decisions and actions may not benefit to the long term China economy.  Given that China plays an important role to the world’s economy, any instability or economic downturn in china will affect economic partners including US, Asian countries as well as Europe.    The world’s economy will be impacted to certain extent.

Q.3.

Tighten the approval, control and review process of investment projects

The National Development and Reform Commission of the People’s Republic of China (“NDRC”) is responsible for setting the policies of economic and social development and provide guidance on reform of economic system.  NDRC should perform robust study, planning and forecasting before approving investment projects.  Financial performance indicators like Internal Rate of Return should be applied to project evaluation.  Demand from consumers should be carefully projected.  After the project has been kick off, progress reviews should be conducted, covering both internally project spending and externally change in market demand.  Post Project Implementation Review should also be carry out to evaluate the economic benefit weakness of the project.  For each of the approval, control and review processes, responsible persons should be identified.

Enhance the independence of the statistics bureaus for impartial statistics data

In China, there are statistics bureaus at city level and provincial level, then ultimately reporting to the National Bureau of Statistics of the People’s Republic of China (“NBS”).  Currently, the mayors and provincial governors have partial control on the local or provincial statistics bureaus, which impaired the independence of the statistics bureaus.  It is suggested to remove the reporting line of the local or provincial statistics bureaus and allow them directly reporting to the NBS.  Besides, the NBS has a department consisting of 32 provincial investigation teams called “调查总队”. The effectiveness and independence of these investigation teams on local monitoring should also be enhanced.

Develop a more comprehensive and quantifiable appraisal system for governors    

A comprehensive appraisal system should address 5 core areas, namely economics, societal, living standard, public service and environmental.  Apart from GDP, the other indicators like Net National Income (NNI), Human Development Index (HDI), Index of Sustainable Economic Welfare (ISEW), Genuine Progress Indicator (GPI), Gross National Happiness (GNH), Sustainable National Income and environmental pollution indices could be incorporated into the appraisal system for a more well balanced KPIs.  Besides, results of Project Post Implementation Review should also be included.  

As commented by President Xi Jin Ping, the appraisal system should address both speed of development and foundation, address reported result and embedded problem, consider improvement in living standard, improvement in society, influence to environment and solid consequences of policies.  GDP alone is insufficient.

Mind-set change: government intrusion vs free market, economic development vs improvement of living standard, economic benefit vs environmental protection

The prime minister has to change the mind-set of the governors.  While planning on government spending, more study and freedom should be given to the free market activities.  While the economic benefits have been created, how to distribute this benefit to the mass residences so as to achieve an overall improvement in living standard has to be carefully planned.  Finally, the sustainability of the environment should not be sacrificed for short term economic achievement.