Taming cycles

Overly ambitious economic growth targets set by career-driven Chinese provincial and city officials have fueled a potentially unsustainable boom in debt-financed infrastructure spending, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 27.

“While these interventions stabilized GDP [gross domestic product] growth through cyclical fluctuations and moderated economic deceleration, they came at a steep price,” write the authors, Wei Xiong of Princeton University and Jeffery (Jinfan) Chang and Yuheng Wang of the Chinese University of Hong Kong, Shenzhen. The rising leverage of local governments, they argue, raises serious concerns about the long-term sustainability of China’s economic model.

China’s economy—the world’s second largest, after the United States’—blends state planning with market mechanisms. It sets annual growth targets and ensures their achievement through macroeconomic management.

In their paper—“Taming Cycles: China’s Growth Targets and Macroeconomic Management”—the authors examine the interplay between national growth targets and their implementation by local officials, who are assessed based on their ability to implement directives from higher authorities. As a result, regional officials often set local growth targets that exceed national targets to ensure compliance with higher-level mandates and are reluctant to lower their targets to accommodate a slowdown in local economic growth potential.

When a region falls short of its target, officials rely heavily on investment in infrastructure such as high-speed railways, highways, airports, and subways. Since local budgets are often insufficient to finance these projects, officials resort to sales of state-owned land and increased local government debt.

As a result, China’s growth has remained remarkably smooth since 2010 (outside of the COVID-19 pandemic), according to the authors. However, even during the relatively stable period of 2011-2019, local government debt soared by 14% of GDP, based on a conservative estimate.

Although infrastructure spending has sustained GDP growth, the authors point to evidence that it has outpaced developmental needs and is yielding diminishing returns. In the past, GDP growth was strongly correlated with other measures of economic health, such as retail sales, corporate revenue growth, and productivity gains. However, these correlations weakened significantly during the 2011-2019 period, they write.

“Achieving GDP growth targets alone does not necessarily translate into broader economic prosperity for households and firms,” the authors write.

Xiong, in an interview with the Brookings Institution, said that while China’s hybrid economic model has consistently met GDP growth targets, the high debt cost and uneven economic gains for households and firms underscore the need for the central government to more actively reduce growth targets during slowdowns. Doing so, he argued, would ease pressure on local governments to engage in unsustainable spending and allow them to experiment with alternate policies better suited to their own regions.

Download the conference draft

CITATION

Chang, Jeffery (Jinfan), Yuheng Wang, and Wei Xiong. 2025. “Taming Cycles: China’s Growth Targets and Macroeconomic Management.” BPEA Conference Draft, Spring.