Growth, Reform, Stability: Two Out Of Three At Best

Prime Minister Li Keqiang delivers his work report to the National People's Congress in Beijing, March 2016

THE NATIONAL PEOPLE’S Congress, China’s parliament, has approved the 13th Five-Year Plan. No surprise to anyone and done with less discussion or even token dissent than is customary.

But China has a blueprint for its economic development for 2016 to 2020. It is much the same blueprint as the top leadership had approved when it wrapped up the fifth plenum of the 18th party congress last October.

Sustaining growth while rebalancing the economy will be top priorities, regardless of the uncertainties of the country’s economic situation and resistance, particularly within state-owned enterprises, to reforms — resistance that Xi’s anti-corruption campaign is steadily rooting out.

Improving social welfare, creating jobs, raising people’s incomes and improving food safety are the chosen mechanisms for doing that. The plan calls for:

  • the annual growth rate to stay above 6.5% over the next five years;
  • 2010 GDP and 2010 per capita income for urban and rural residents to double by 2020;
  • a further 100 million people to move to cities from rural areas by 2020. The proportion holding urban residency hukou to reach 45%;
  • innovation to play a key role, with the tech sector contributing 60% of new growth within five years. R&D investment is to be equivalent to 2.5% of GDP (up from 2.1% in 2015);
  • water and energy consumption per unit of GDP to be cut by 23% and 15% and carbon dioxide emissions to fall 18% on the same metric as China’s strives to meet its international commitments to reducing emissions and increasing clean energy usage;
  • growth to change from being investment- and export-led to driven by domestic consumption and services; yet
  • 30,000 kilometres of high-speed rail tracks to be laid by 2020, against 19,000 kilometres this year, including a second line to Tibet linking Lhasa to Chengdu.

The plan also mentions a potential 180 kilometres undersea rail tunnel connecting Fuzhou to Taipei, building a Chinese space station, launching a homemade aircraft carrier and establishing hard caps for coal use by 2020.

Those may be categorised as aspirational goals ahead of 2021’s 100th anniversary of the party’s founding, but the practical and arduous challenge before then is moving manufacturing up the value chain from commodities processing and cheap exports and to increase services share of the economy.

Like Japan and South Korea before it — and the industrialised nations of the West before them — China will confront the simple truth that rebalancing productive capacities will come at the cost of structural changes that have political ramifications.

For the party, whose monopoly on power depends on sustaining rising standards of living for all, it is critical that that transformation is handled in a way that is not socially destabilizing. Unlike in a relatively unskilled economy, as a nation moves up the value chain, job-losers quicky find that whatever skills they have are not necessarily readily transferable to the available employment.

And only so much of China’s excess industrial capacity — and its accompanying labour — can be exported via its basic-infrastructure-heavy ‘One Belt One Road’ initiative, which in any case will take decades to implement.

At the end of the NPC session, Prime Minister Li Keqiang, seen above delivering his work report, promised the plan’s 6.5% growth target would be met, and said that taxes and red tape would be cut to ensure it was. But it is the structural reforms that are truly needed to make good on that figure.

The Catch-22 is that economic stabilization is a pre-requisite for the reforms, especially within the state-owned sector, but disaffected workers on the streets and volatile financial markets will be dealt with by carrot-and-stick measures that will delay reform, not bring it forward.

In the meantime, for this year, the fiscal deficit will be increased to 3% of GDP from last year’s 2.4% to juice growth and buy social stability.

Sustaining growth, instituting structural reforms and maintaining social stability are conflicting goals. One will have to give. Tackling overcapacity and deleveraging corporate debt and the shadow banking system will necessarily fall down the priority list.

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One response to “Growth, Reform, Stability: Two Out Of Three At Best

  1. Pingback: China’s Steel: The Big Chill | China Bystander

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