Taming Cycles: China's Growth Targets and Macroeconomic Management

China's hybrid economy blends state planning with market mechanisms, using annual economic targets to guide development and macroeconomic management to ensure their achievement. Local governments set ambitious growth targets to align with central mandates and incentivize subordinates, leading to asymmetric adjustments: Targets rise rapidly during booms but decline sluggishly during slowdowns. This dynamic has heightened pressure on local governments to intervene in the economy, particularly after 2010. Our analysis shows that when a region falls short of its growth target, it increases infrastructure investment, land sales, and local government debt to close the gap. Notably, during the relatively stable period of 2011-2019, overly optimistic targets contributed an additional 14.0 percent of GDP to local government debt. While these interventions helped smooth cyclical fluctuations and moderated the trend of GDP deceleration, they also eroded GDP growth's reliability as an economic indicator, weakening its correlation with corporate revenue, household demand, and total factor productivity gains.