Economy, Talking Point

Bowing to the inevitable?

What China wants to achieve with its 13th Five-Year Plan

li keqiang

Li Keqiang bows at the NPC: the lady is Yan Junqi, head of the China Association for Promoting Democracy

Since 1953 China’s five-year plans have been a staple of the government’s decision-making process. That said – after the fanfare of their unveiling – the blueprints have never been slavishly adhered to. At times they have been disastrous in their impact. The 2nd Five-Year Plan ran from 1958 to 1962 but became a somewhat fluid document reflecting the political and economic objectives proposed and constantly altered by Mao Zedong. One of the utopian targets in that plan was the Great Leap Forward, which aimed to see the Chinese economy surpass the UK and close some of the wealth gap with the US within five years. But the results were awful with famine ravaging the country. The 3rd Five-Year Plan was then implemented much later – following this period of economic chaos – in 1966.

(In case you are wondering, official Chinese sources say that Mao’s target of overtaking the British economy was finally reached in 2006, or 44 years behind target.)

Since market reforms began in 1978, China’s economic planners have become a lot more pragmatic, and the diktats of the plans have been followed less dogmatically. Performance has often deviated far from the predicted outcomes. For example, the 6th Five-Year Plan from 1981 to 1985 called for annual economic growth of 4%. The economy actually expanded 11% a year during the period. GDP then grew 11.6% a year between 1991 to 1995, far surpassing the 6% rate demanded in the 8th Five-Year Plan.

Now another planning cycle is underway with Chinese lawmakers gathering this week to vote on the draft of the 13th Five-Year Plan, which runs from 2016 to 2020. Generating GDP in excess of government targets is now getting much harder, of course. But are the goals in this plan any more more likely to be achieved this time round?

How did the last plan go?

Everything has gone according to the blueprint, the Chinese government pronounced this month.

“Our country made impressive achievements in its development in the 12th Five-Year Plan period, defying a complicated international environment and challenging tasks of carrying out reform and development and maintaining stability at home,” Chinese Premier Li Keqiang told almost 3,000 lawmakers during the annual parliamentary gathering in Beijing (known as the National People’s Congress, or NPC).

According to Li’s government work report, China achieved 24 of the 25 goals set in 2011, and many were accomplished ahead of schedule or exceeded their targets.

The only missed target: to achieve an annual growth rate for exports of 6%. “A 96% success rate is good enough amid downward economic pressures,” the China Daily chirpily proclaimed, citing verdicts from local economists.

Up to 12 of the 25 targets were “compulsory” in nature, according to the same newspaper, while the rest were more or less an indicator of the government’s policy wishlist. The economic growth rate, which was set at 7% from 2011 to 2015, for instance, did not constitute a ‘compulsory’ target. It turned out that GDP grew at an average rate of 7.8% in the past five years. Some compulsory goals, such as keeping the Chinese population below 1.39 billion and maintaining arable land of 1.8 billion mu, or 120 million hectares, proved relatively easy to achieve too.

Of course it is always debatable whether the State Council is quite as effective in implementing its policies as these work reports suggest. (In 2014 Li was said to have pounded the conference table in frustration at local government officials who refused to follow the central government’s policies. His predecessor also told foreign journalists that the worst kept secret in the Chinese capital was that many policies never make their way out of Zhongnanhai, the walled compound where the nation’s leaders reside, see WiC241).

Sometimes targets are fudged too. A much-discussed goal set in 2011 (by Premier Wen Jiabao’s administration) was the provision of 36 million affordable housing units. Construction seemed to be lagging behind, but the State Council reported that the goal was overachieved as building had begun – albeit not concluded – on more than 40 million residential units.

Premier Li was also upbeat on environmental policy, a key theme of the 12th Five-Year Plan. He said his administration had achieved all of its goals including the reduction of pollutant emissions by 12%. The Chinese public may need more convincing on this score, of course, based on the realities of life in cities including Beijing. In fact, a TV documentary on air pollution dominated netizen discussion during the NPC’s meeting in the capital last year (see WiC273).

Others acknowledged that there isn’t much work done in tracking the progress of the plans or the achievements typically announced. “Rarely do people compare the plan and the eventual reality,” Mao Yushi, chairman of the Unirule Institute of Economics in Beijing, told the New York Times. “Not one five-year plan has unfolded as planned. Why? Because you can’t predict the problems five years from now.”

What’s in the new blueprint?

An outline of what might go into the planning document was published in October last year during a plenum session of the Chinese Communist Party (CPC). Next week Chinese lawmakers are expected to approve the finer details.

For some the key news is that the Chinese government has said it wants the annual growth rate to stay above 6.5% over the next five years. The goal: to double 2010 GDP and 2010 per capita income for urban and rural residents by 2020.

Innovation – led by the likes of internet services – is forecast to play a key role. In five years time the government wants the tech sector to contribute 60% of the nation’s new growth. Investment in research and development is expected to reach 2.5% of GDP (from 2.1% in 2015).

China is also set to witness another of the world’s biggest human migrations. By 2020 about 100 million people in rural areas will move to cities. The proportion holding urban residency hukou – documents that permit them to use city welfare services – is projected to reach 45%.

The environment is a priority (again), given China’s international commitments to reducing emissions and increasing clean energy usage. Water and energy consumption per unit of GDP are expected to be cut by 23% and 15%. Carbon dioxide emissions should fall 18% on the same metric.

“The growth pattern is truly changing from an investment, export-led economy to a domestic consumption and services-driven one, leading to slower albeit healthier growth,” Xinhua remarks.

Yet the government isn’t ready to abandon a key growth strategy of the past: injecting money into the economy via mega infrastructure projects. By the end of 2020, if everything goes to plan, China will have about 30,000km of high speed rail tracks linking 80% of its cities, versus 19,000km this year. Along with this expanding network, there are also plans to build a second railway line to Tibet, linking Lhasa with the capital of Sichuan province, Chengdu.

The draft of the 13th Five-Year Plan even mentions Taipei as a potential destination for bullet train passengers from the mainland, via a 180km undersea link running from Fuzhou. Taiwan’s media is not convinced of the project’s feasibility, mind you. “Why don’t you plan for a railway connection from Beijing to the moon?” was one of the comments on News Lens, an internet newspaper based on the island.

Why is the year 2020 important?

“Those perusing China’s reform plans can’t help but notice a certain date popping up with surprising frequency: 2020. A number of key goals, all seemingly unrelated, are pegged to this date,” a columnist at The Diplomat observes.

That’s perhaps because by 2020 China is supposed to become a xiaokang shehui (moderately prosperous society). It has been a recurring slogan in Chinese politics since 2003, although the xiaokang concept dates back to at least the time of Confucius, denoting middle-class prosperity in which basic needs are comfortably met, with a bit to spare besides.

(By contrast, Mao often referred to another Confucian concept, datong shehui, i.e. a society without private property, social groupings and crime.)

Of course, the stress on the xiaokang ideal also implies further economic growth. Last year China achieved a GDP growth rate of 6.9%, the lowest in 26 years. Yet according to Xinhua, the economy now stands at Rmb67.7 trillion ($10.3 trillion) and “sits comfortably as the world’s second biggest”. Assuming it keeps expanding at a rate of 6.5%, China’s GDP will exceed $14 trillion by 2020, Xinhua predicts, which will equate to 70% of the American economy (with a GDP of $20 trillion on Xinhua’s calculation, using current foreign exchange rates).

Other ambitious plans range from building a Chinese space station, launching a homemade aircraft carrier and establishing hard caps for coal use by 2020.

Notably these achievements are timed to prepare for 2021, when the 100th anniversary of the founding of the Chinese Communist Party will be celebrated.

In fact these celebrations make up the first of two “centenary goals” put down in writing by the 18th Party Congress in 2012, when Xi Jinping assumed power. Alongside the 2021 shindig, the other centenary goal was pegged to the 100th anniversary of the People’s Republic of China in 2049.

What are the challenges for the 13th Five-Year Plan?

“The larger the economy grows, the greater the difficulty of achieving growth. Every percentage point of GDP growth today is equivalent to 1.5 percentage points of growth five years ago or 2.5 percentage points of growth 10 years ago,” Li Keqiang told the delegates this week, warning of “more and tougher problems and challenges this year”.

That seemed to chime with Moody’s outlook, when it lowered China’s credit rating from stable to negative last week, warning against weakening fiscal metrics and a continuing fall in foreign exchange reserves.

This week the rating agency followed up with another research report suggesting that China is bound to fail in at least one of its three conflicting aims of achieving growth, instituting reforms and maintaining stability.

Part of what makes it a mission impossible, Moody’s says, is the chronic debt sitting on most local government’s books.

To stimulate local economies, Li has budgeted a fiscal deficit of Rmb2.18 trillion, or 3% of GDP, this year. This compares with 2.3% of GDP in 2015 and is the biggest deficit since 1976. The proactive fiscal policy will see the central government absorb Rmb1.4 trillion of the shortfall, while the remaining Rmb780 billion will be loaded onto the various local governments. All in all, the State Council says the measures will alleviate the tax burden on enterprises and individuals by over Rmb500 billion.

That increase in the budget deficit, the Financial Times reports, was still below market expectations, while the target range for 2016 GDP growth of 6.5% to 7% is above what many international economists believe to be realistic.

“It’s admittedly becoming harder and harder to pacify and please investors,” HSBC noted in a research piece.

As he comes up with new initiatives to do so, Li’s government work reports grow longer each year. The document contained 15,000 words in 2013, but surged 30% to around 20,000 words this month. Over a tenth of the content is dedicated to supply-side reforms such as cuts in industrial capacity, especially in coal and steel, although the Wall Street Journal argues that the State Council was grappling with the same problems last year, and has done little to prevent them from worsening.

“His [Li Keqiang’s] reluctance to draw blood underscores a critical change that has come over a Chinese leadership that once had a reputation for pursuing economic goals with ruthless pragmatism. Today, politics trumps economics,” the Journal’s Andrew Browne writes.

But according to the state media, such withering criticism from overseas is nothing new.

Xinhua even ran an article this week listing “10 biases against China that the West needs to discard”. Topping the chart is the concern that China’s development model is unsustainable. “It is true that China is continuously facing problems and challenges in its development, but the clichéd prediction of a ‘coming collapse in China’ made by speculators overseas has never come about. It seems unlikely such rhetoric will end this year, however,” Xinhua noted.

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