Shanghai takes lead in pursuit of quality growth

City becomes first to eschew GDP target as old development model loses steam

Shanghai, a city famed for its forward-thinking approach to business and financial matters, has shown its innovative prowess once again by becoming the first major locality in China not to set an official GDP growth target. With central authorities banging the drum on putting quality development ahead of high growth targets, municipal authorities in Shanghai have clearly gotten the message.

As mayor Yang Xiong said in the government work report delivered Sunday, Shanghai will focus on optimizing its economic structure and promoting innovation-driven growth.

Municipal leaders in Shanghai have taken a wise step by not setting a growth target. In the past, critics said fixation on excessively high goals led officials to ignore worsening social and environmental problems. Still, recent developments in Shanghai don't mean that municipal authorities will disregard the economy completely. Doing so would hurt the interests of investors, local residents as well as the broader economy.

Shanghai will have to modify its economic strategy, as its current model of growth now faces many challenges. Shanghai has long been a magnet for migrants, and a steady stream of cheap outside labor has helped the city flourish. Yet, with many migrants opting to stay, the city's population has swelled, creating a surging demand for social services and straining local budgets.

On the other side of the coin, development in other parts of the country means migrants and young local workers can now find high paying opportunities outside of Shanghai. As a result, many local businesses in the city are now struggling with labor shortages and rising employment costs.

Of course, from a grand economic perspective, these aren't Shanghai's only problems. Heavy reliance on investment and export manufacturing make the city vulnerable to external shocks. In the past, local authorities have offered subsidies to fuel growth; yet used over the long term, this strategy could become a crutch that limits corporate competitiveness and constrains fiscal revenue. Similar claims could be made for preferential policies to attract investors and stimulate growth.

Such problems are not exclusive to Shanghai. Yet, as a first-tier city, Shanghai should lead efforts to innovate as the tenor of China's economy settles into what top leaders describe as a "new normal." Indeed, Shanghai has already reached a point of relative prosperity and development where slower growth is to be expected - Shanghai's GDP grew 7 percent last year, undershooting an initial target of 7.5 percent.

Looking ahead, the city should make better use of the Shanghai Free Trade Zone (FTZ). As an open platform, the FTZ can provide more space for traditional Chinese manufacturers to achieve industrial upgrading and explore opportunities abroad.

At the same time, authorities should also focus on modifying the government's role in business. In September 2013, the government released the "negative list" to streamline investment procedures in the city's FTZ. This is a good example of government efforts to create a transparent market environment for all investors. With fair, market-driven allocation of resources now obviously a priority, further initiatives to limit and define the government's place in the economy should be promoted. Indeed, the local government's decision not to set a GDP target can also be seen as a move to encourage investors to focus on fundamentals and value.

As mentioned above, the government will surely focus on reforms and the transformation of its economic role. During this process, economic indicators and market data will be watched closely by administrators looking to gauge the speed and depth of reforms.

As time goes on, other localities in China are expected to heed the central government's calls for slower growth. Several major local economies - including Hebei and Zhejiang provinces as well as Beijing - have already set lower GDP targets. As Chinese Premier Li Keqiang said at the recent Davos Forum last week, China is willing to tolerate slower growth as it pursues structural reforms.

It's possible that other provinces and cities will follow Shanghai's lead and drop their targets. Let's hope that this is the case. At this point, China can do without the big-ticket projects and inflated investment packages that have long underpinned its rosy growth figures. Efficiency and structural adjustments are now what the country truly requires.