Economy, Talking Point

Quality not quantity

Why Beijing’s new ‘Five Year Plan’ puts less emphasis on GDP growth rates

Quality not quantity

A round of applause, please: the plenum confirmed Xi Jinping will be China's next leader

Invitation only. That was the welcome for walk-in customers at the Jingxi Hotel in Beijing earlier this week, where a small group of China’s top bosses was gathered for a key meeting.

The Jingxi is owned by the People’s Liberation Army (so don’t count on spa treatments) and rarely accepts foreign guests. Those who have stayed there recall its “extremely large doormen” and excellent yogurt.

True to form, no outsiders were being allowed onto hotel premises this week either. Apparently, the only sign of events inside was the queue of black Audi A6 sedans lined up on the hotel forecourt. Because this was no ordinary off-site: the attendees were top Communist Party officials, and they were discussing policy plans that will have a major impact on the global economy in the years ahead.

What was the meeting for?

It’s the annual plenum of more than 300 members of the Party’s Central Committee (one down from the Politburo, which it nominally appoints). The main item on the agenda at this year’s gathering was the country’s latest five-year plan (the 12th one), which will run from 2011 to 2016 and be submitted to the annual session of the National People’s Congress in March next year for ratification.

Like every self-respecting conference, the four-day session needed a theme. And the rallying cry was “Inclusive Growth”, which first got a mention from President Hu Jintao in September. He seems to have borrowed it from the Asian Development Bank, which has used the phrase to campaign for balanced economic and social progress.

How does it differ to the “harmonious society”, a recent Hu favourite? It isn’t immediately clear but it seems to imply a stepping-up of efforts to address China’s widening income gap, as well as to secure more sustainable economic growth.

Concerns about the widening gulf between haves and have-nots have been trailed in recent state media editorials. Many have cited World Bank findings that China’s Gini co-efficient – an indicator for income inequality – is now above levels said to forewarn of social unrest. Others call for a rethink on GDP growth targets, especially to look beyond a purely quantitative scoring of success. For example, the China Daily reported that Sichuan province is going to stop assigning growth rate quotas to its officials next year. Instead the health of the local economy would be measured “in the well-being of its citizens”.

How will it compare to previous five-year plans?

The current blueprint is the latest in a line dating back to 1953, when Soviet engineers were the go-to men on how best to build an industrial powerhouse.

Things have moved on since. But the latest five-year outlook doesn’t look radically different to the 11th Five Year Plan, although the focus on upgrading the “quality” of growth is definitely being sharpened.

In 2006 the talk was also of saving energy and protecting the environment. More resources were to be allocated according to market signals rather than government directives. But the planners back then could hardly have anticipated the need for Rmb4 trillion of stimulus spending, which must have blunted some of the original thinking.

Still, China’s transformation from the days of earlier plans is clear enough. Take the 9th Five Year Plan, for instance, which concluded 10 years ago. At that point, Chinese GDP was still only a fifth of the amount forecast for the end of this year. For the preceding five-year period, the major objectives were to deepen the reform of the state-owned enterprises, and to promote policies to encourage the development of a more market-driven economy. A lot’s changed since then: today, the leading SOEs are making billions of dollars of investments overseas; and more than 150 million Chinese investors hold brokerage accounts.

And the specific policies this time round?

Translating how the presentations in the Jingxi ballroom will end up in practical outcomes is no easy task. More of the details will be fleshed out between now and next March too.

Fortunately, a detailed research note from HSBC’s China Macro Economics and Equity Strategy team provides insights. ‘China’s next 5-year plan: What it means for equity markets’ looks first at the priorities likely to be set for the five years ahead, and then makes suggestions on the sectors (and companies) that will benefit.

First of all there are the specifics of the GDP growth goals. HSBC says it’s best not to over-fixate on the targets (China always over-delivers: in the current plan GDP growth was pegged at an 8% forecast but has come in at an annual average of 11.4%). But it still speculates that the nation’s overall GDP growth target could be lowered – in a fairly revolutionary break with past practice – so as to stress quality over quantity. “Steady and sustainable” are the new watchwords.

The plan’s authors also want to see laggard provinces catch up with their peers. That is likely to mean a doubling down on development initiatives in poorer areas, like the country’s western regions and the northeastern rustbelt. These provinces will be getting a much greater share of infrastructure investment and government funding, and they will expect to grow at a faster 10%-12% annual rate.

More of that growth is also going to have to come from private consumption. Here – at last – is something that China and the rest of the world seem to agree on. The share of private demand in total GDP has fallen sharply from nearly 50% two decades ago to 36% last year, according to HSBC, and how best to get that figure back up (and reduce reliance on investment and exports) is a key concern. Expect further efforts to boost household incomes, primarily through higher minimum wages, as well as lower personal taxes.

In this context, this week’s unexpected announcement of a 25bp interest rate hike helps households by raising the return on savings. It also reduces some of the temptation to borrow money and splurge on manufacturing capacity, investment and real estate development. That probably isn’t going to play quite as well with Chinese companies, especially the SOEs, who – in the coming five years – look like being hit with the triple whammy of higher labour and financing costs plus increases in corporate tax to offset the reduced take from households.

More city living is on the cards?

Yes, the plan is to speed up the demographic shift to the cities. Moving people in their millions fits with goals in domestic spending, as urban per capita consumption was 3.5 times that of rural areas in 2009.

HSBC expects 55% of the population to be city dwellers by 2015, implying at least another 150 million urban newcomers. That will require a loosening of hukou permit restrictions (see WiC39), HSBC thinks, to encourage migration. And it reinforces policymaker determination to prevent rapid run-ups in property prices. Otherwise new migrants just won’t be able to afford city life.

Some new favourites?

Post-meeting, the list of the ‘emerging strategic industries’ was confirmed. These are the sectors that are supposed to be at the forefront of all that ‘higher-quality’ economic growth.

HSBC identifies a so-called “Magic 7” of low-carbon contenders: energy-saving and environmental protection firms, next generation IT, biotech, high-end manufacturing, new energy, new materials and composites, and clean energy cars. It says the government will establish dedicated industrial funds for these firms, as well as encourage greater investment from private capital. The Shanghai Securities News calculates that this group currently accounts for about 3% of national GDP, but is expected to contribute five times that by 2020.

This seems to offer further evidence of a change in the tone of industrial policy, away from a preference for centrally-controlled sectors like telecoms, coal, oil and shipping.

Planning for success, then?

The Central Standing Committee certainly hopes so. The question, of course, is whether the Five Year Plan style of coordination and control can push the country forward into its next phase of growth, especially when much of the current thinking seems to call for ‘bottom-up’ initiatives from R&D focused firms.

Back in the US, columnists like Thomas L Friedman have written enviously of China’s “moon shot” investments in multibillion-dollar, long-horizon, game-changing initiatives (see WiC81, And Finally). Somewhat despondently, his like compare the advantages of the autocratic approach to the political gridlock throttling longer-term thinking in Washington.

As Friedman put it: “One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power. China’s leaders understand that in a world of exploding populations and rising emerging-market middle classes, demand for clean power and energy efficiency is going to soar.”

For America the columnist notes, “Our one-party democracy is worse. The fact is, on both the energy/climate legislation and healthcare legislation, only the Democrats are really playing. With a few notable exceptions, the Republican Party is standing, arms folded and saying ‘no’. Many of them just want President Obama to fail. Such a waste.”

It almost sounds like Friedman would be happier with a five year planning approach of America’s own. Of course, regular readers of WiC will know that it is not quite so straightforward. The exercise of Chinese power is a lot messier than its monolithic image suggests. Witness the State Council’s struggle to enforce its will on a host of bureaucrats and state-owned businesses lower down the political food chain, on issues from industry consolidation to property development and environmental curbs.

That challenge will soon pass to a new enforcer. The other main announcement this week: vice-president Xi Jinping has been confirmed as vice chairman of the party’s Central Military Commission. This seems to make him a shoe-in to take over from Hu Jintao in two years time, which makes Xi the man ultimately responsible for implementing the plan under discussion at the Jingxi Hotel.

But with China facing some severe challenges – some predict the financial sector could be weighed down with post-stimulus bad loans by 2012 – Xi likely knows that sticking to the plan could be harder than ever.

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