Did I get your attention? No China has not announced an NGDP level targeting regime, but did so in an indirect fashion. Let me explain why. The clever French economist Nicolas Goetzmann pointed me to this quote on ft.com:
“Speaking to several thousand current and retired Communist party officials in the Great Hall of the People, Mr Hu, who along with Premier Wen Jiabao has steered China for the past decade, also unveiled economic targets, saying the government would strive to double rural and urban incomes by the end of 2020.”
If you want to double the income level in China towards 2020 then that would mean 9% nominal GDP on average per year (Nicolas educated me on that as well). So de facto Mr. Hu just announced an 9% NGDP level target. And as Nicolas also convinced me – this is very good communication as it effectively is a level target rather than a growth target. If NGDP falls behind the target one year then growth will have to be higher the next year to hit the target in the 2020 income target.
Chinese officials seem to think that trend real GDP growth is likely to slow to around 7% in the coming decade – as the catch-up potential is reduced and China is facing demographic headwinds. That would effectively mean that China is now targeting a medium inflation rate around 2% (9%-7%).
As I have shown in an earlier post the People’s Bank of China (PBoC) more or less kept money supply (M1) growth around 15-16% for a little bit more than a decade. Obviously PBoC has to target a lower rate of money supply growth to hit a 9% NGDP target. Since 2000 M1 velocity has dropped around 1% so a M1 target consistent with a 9% NGDP target would likely mean 10% M1 growth. That is significantly faster than now, but also significantly lower than what used to be the case.
However, China is continuing to liberalize its financial markets and velocity is therefore likely to be less stable than it used to be the case, which will make money supply targeting much more challenging. Therefore the PBoC should obviously start to move towards NGDP targeting rather than money supply targeting. A really (really!) optimistic spin on Mr. Hu speech is that China indeed is moving in that direction.
Finally thanks to Nicolas for the pointer to Mr. Ho’s speech. If you like this post give the credit to Nicolas, but if you hated it blame me. Have a look at Nicolas blog (in French – I have understand nothing…) here.