Why China’s GDP growth targets tell only half the story
In this commentary Michael Pettis makes the argument that China’s GDP figures are not falsified, but they are conceptually incomparable to GDP figures from market economies because China operates largely under soft budget constraints. Unlike hard-budget economies where firms face bankruptcy if investments fail, in China many entities (especially local governments and SOEs) can continue borrowing indefinitely, backed by implicit state guarantees, regardless of their balance sheet health.
The GDP distortion mechanism
When a bad investment is made in a hard-budget economy, the loss is immediately recognized as profits fall, asset values are written down, and GDP declines accordingly. In a soft-budget economy like China, those losses can be “capitalized” rather than expensed: the asset stays on the books at cost, no loss is recorded, and reported GDP remains artificially elevated.
Debt as the tell-tale sign
The key observable symptom is debt growing faster than GDP. As long as China can roll over capitalized losses through new credit, it can hit any GDP target Beijing sets, not by falsifying data, but by deferring loss recognition. This is precisely why China hit its 5% target with “astonishing precision” in 2025, even as quarterly growth decelerated throughout the year .
Historical parallels
Pettis draws parallels to the USSR in the 1960s, Brazil in the 1970s, Japan in the 1980s, and even Ireland, Spain, and the US in the 2000s where soft-budget dynamics inflated reported growth until the inevitable adjustment. Japan’s “lost decade(s)” is the closest analog for a slow-burn resolution, as opposed to a sudden crisis .
The bottom line
China’s GDP growth target should be read as a joint function of output, credit expansion, and deferred loss recognition and not a pure measure of value creation . The longer the divergence persists, the larger the eventual adjustment will be, whether through slower growth, financial stress, or explicit transfers to absorb accumulated losses .
What GDP Means in a Soft Budget Economy Like China
By: Michael Pettis – Peking University
The Gulf crisis and China’s hidden vulnerabilities
George Magnus argues that the notion of China being the chief beneficiary of the US-Iran war is wrong, on the contrary, the conflict presents Beijing with a set of serious economic and geopolitical headwinds, not tailwinds.
Energy vulnerability
China imports 70% of its oil needs, with a third sourced from the Gulf. While high oil inventories offer temporary relief, a prolonged conflict puts China at real risk of an energy squeeze. Unlike the US, which benefits as a net energy exporter, China faces negative terms-of-trade effects from surging energy prices.
Trade and growth at risk
China recorded a record $1.2 trillion trade surplus last year (6% of GDP), with net trade possibly accounting for up to a third of its growth. A war-induced global demand shock or recession would directly undermine this critical growth driver, compounded by the fact that over a dozen Global South countries (including Brazil, India, Turkey, and Saudi Arabia) have already moved to restrict Chinese imports.
GCC relations matter more than Iran
China’s commercial ties with Gulf Cooperation Council (GCC) countries (Saudi Arabia, UAE) are more than eight times larger than with Iran. Iran’s escalation of the war into GCC territory has paradoxically pushed those countries closer to the United States, weakening China’s regional influence.
China’s strategic passivity
Beijing has been largely passive in the conflict because it cannot meaningfully shape its course or end it. This passivity reveals a deeper truth: China’s economic model depends on stable globalization, open sea lanes, and functional supply chains, all of which the war disrupts.
Domestic weaknesses compound the problem
Outside its advanced tech sectors, the rest of China’s economy suffers from sluggish growth, overproduction, weak profits, high unemployment, and deep fiscal stress. Real estate and infrastructure — now six years into structural decline — may only be halfway through adjustment, and the government lacks an acceptable political solution.
Why the war in Iran is not a gift to China
By: George Magnus – Oxford University
