China has proven that GDP growth targets can be achieved over decades. However, it is precisely this “achieving the goal at any cost” approach that has created risks for the economy, distorting its structure and forcing officials to increase debt.
The Politburo emphasized the need to achieve an annual growth rate of 5%, even though the economy was not performing as expected.
The importance of this goal was confirmed by a coordinated stimulus program presented by key economic institutions — the Ministry of Finance, the People’s Bank of China, and the State Council’s Development and Reform Commission.
The stimulus measures included lowering interest rates in companies and reserve requirements to inject liquidity into the economy, fiscal support to local authorities to ease the debt burden, and increased budget spending.
At its December 2024 meeting, the Politburo reaffirmed its commitment to the GDP growth target (which was achieved at the end of the year) and made it clear that the target for 2025 would also remain at 5%.
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These actions by the Politburo demonstrate the complex dynamics of China’s “hybrid” economic model, which is unlike any other, write Wei Xiong, a professor at Princeton and author of “The Mandarin Model of Economic Growth” (see box below), and his co-authors from the Chinese University of Hong Kong in Shenzhen, Jeffrey Chan and Yuheng Wang.
The Mandarin Model of Growth
Wei Xiong described China’s economic management system in his 2018 work The Mandarin Model of Growth (and later expanded his research with a co-author from the Chinese University of Hong Kong). In Chinese history, “mandarins” were officials.
Wei Xiong’s model is based on Robert Barro’s endogenous (i.e., determined by internal rather than external factors) growth model, in which economic growth depends on institutional factors (economic and fiscal policy, etc.).
The growth of the “mandarin economy” is determined by two key factors: the central role of the state in stimulating the economy through investment in infrastructure, and the system of relations between the center and regional authorities.
The center appoints regional leaders and evaluates them based on regional GDP growth, which creates a situation of “competitive racing”—each regional leader is interested in being “better than their neighbors.”
On the one hand, this stimulates economic growth. On the other hand, it creates risks of distorting the structure of the economy, increasing the debt burden, and manipulating statistics for the sake of formally achieving targets.
Macroeconomic management
As a result of market-oriented reforms that began about half a century ago, China has created a “hybrid” economy that combines state planning with market mechanisms.
Although rigid central planning is a thing of the past, the central government—the State Council of the PRC—continues to guide economic development through annual and five-year plans. This unique synthesis distinguishes China’s economic dynamics and policies from those of traditional market economies.
The practice of setting an annual GDP growth target and ensuring its achievement through macroeconomic policy is the cornerstone of China’s economic planning, serving both as a policy guide and a mechanism for its implementation, note Wei Xiong and his co-authors.
