China’s new economic plan to test leadership’s political resolve

A lot is at stake and the global economy needs China to succeed.

March 22, 2016 20:51
4 minute read.

Flag of China. (photo credit: Wikimedia Commons)

 China’s new economic plan aims to balance measures aimed at supporting near-term growth with the steps needed to carry out painful reforms in old-tech industries, goals that will test the political resolve of Chinese leadership as it strives toward an ambitious target of achieving a prosperous society by 2020.

The ruling Communist Party of China’s (CPC) National People’s Congress (NPC) endorsed at its annual session the new, 13th Five-Year Plan (FYP) for the years 2016-2020, that aims not only to find new drivers of growth for the slowing economy but also ensure benefits from the accrued wealth reach a larger segment of China’s massive population.

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The importance of the new plan cannot be overestimated. China has accounted for as much as a third of global economic growth in the past several years, and with increasing global economic and financial headwinds and sluggish growth elsewhere, much hinges on China’s success of finding ways to boost its economy.

The new economic plan is the first adopted under the current generation of Chinese leaders headed by Party Secretary Xi Jinping, highlighting the political significance for the Chinese government. China aims to complete the building of a “moderately harmonious society” by 2020, in time for the centennial of the founding of the CPC (in 2021) and as part of the “rejuvenation of the Chinese nation” touted by Xi.

But making the new plan work will test every bit of leadership of President Xi, Premier Li Keqiang and the entire government. Many economists doubt the ability of the government to deliver on its promises of both carrying out painless reform while at the same time ensuring sustainable growth in the world’s second-largest economy and avoiding the “middle- income trap.”

China’s gross domestic product (GDP) slowed to 6.9 percent in 2015, the slowest in 25 years, and while the government has acknowledged China’s transition to a “new normal,” the issue of finding new growth drivers has been put in the center of the new plan. Chinese leaders had called the country’s previous economic growth model “unbalanced and unsustainable.”

Since the beginning of China’s reform and opening in 1978, China has relied on investment, capital accumulation and manufacturing and exports to drive growth. While this growth model has succeed in lifting 500 million people out of poverty and making China the world’s second- largest economy behind the US, it has run its course, especially after the 2008 global economic crisis.

China is currently in the midst of a transition away from reliance on exports to consumption and services, and some of the goals put forth in the 12th FYP were successfully met.

Consumption and services already account for more than half of GDP and China’s urbanization rate also crossed the 50% threshold. Acknowledging the fast greying population, authorities have also gradually eased and eventually abolished the onechild policy.

But when the global economic crisis hit in 2008, China responded with a massive CNY4 trillion-stimulus (subsequently followed by further stimulus packages), leading to some of the structural excesses mentioned by policy makers, such as massive overcapacity in steel, coal and other traditional industries. Barclays estimates the general government deficit in 2015 widened to 3.4% of GDP, above the 2.3% budgeted deficit. Taken together with local government debt and weaknesses in the banking system, this raises questions about the government’s ability to deliver further fiscal stimulus.

Faced with faltering global growth and several stock-market routes since last summer, China’s central bank took several steps including repeatedly cutting required reserve ratios for banks and devaluing the Chinese yuan (or renminbi). Not all of China’s economy is slowing down – in fact, high-tech and e-commerce are thriving.

As part of the new five-year plan, China plans to restructure industries, which may lead to layoffs of millions of workers, and this has already led to worker protest, especially in China’s “rust-belt” northeast provinces.

At the NPC’s concluding press conference, Premier Li voiced confidence over the government’s ability to balance cyclical support with structural reform. Li said the structural reform can unleash new vitality and the government can cut back bloated industries without mass layoffs. Li said the government could still offer more aid for laid-off workers, in addition to a CNY100 billion ($15.3 billion) fund announced in February aimed at relocating workers who lose their jobs.

The government has set a target of adding 50 million new jobs in the coming five years, and plans to further promote urbanization in order to solve the problem of hukou, which reduces workforce mobility by tying people to their household registration location and preventing access to quality services.

The achieve Xi’s goal of doubling China’s GDP by 2020 from 2010 levels, the government said the economy needs to grow by an average of 6.5% over the 2016-2020 period, and that is the goal set in the 13th FYP.

Some economists expect the government to resort to further monetary stimulus in order to achieve this goal, even though at the last G20 meeting in Shanghai in late February, leaders have promised not to resort to “competitive devaluation.”

But questions remain over the remaining firepower in the government’s arsenal, and its ability to execute painful reforms in the face of political opposition and social unrest.

A lot is at stake and the global economy needs China to succeed.

The author is the founding director of The Chinese Media Center (CMC), at the School of Media Studies of The College of Management Academic Studies, Rishon LeZion.

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