Five issues China must address in its latest five-year plan

Francis T. Lui says China's five-year plan must address the salient issues of its structural transformation

PUBLISHED : Tuesday, 27 October, 2015, 5:59pm
UPDATED : Tuesday, 27 October, 2015, 5:59pm

The Central Committee of the Chinese Communist Party meets this week for the 5th plenum of its 18th National Congress. The main item on the agenda is to discuss and approve the 13th five-year plan, which will span from 2016 to 2020. In a globalising world shaped by powerful market forces, are national five-year plans typical of command economies still relevant?

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Five-year plans set up targets, many of which often turn out to be grossly inaccurate. The worst one for China was the 2nd five-year plan of 1958-1962, where none of the multiple targets were met. The 6th (1981-85) and the 8th (1991-95) plans were also way off-target. Gross domestic product growth target for the former was 4 per cent per annum, but it finished up at 11 per cent instead. The average growth rate of 11.6 per cent from 1991 to 1995 also deviated wildly from the original target of 6 per cent.

If Hong Kong wants to benefit more from the five-year plan, it has to uphold its own entrepreneurial spirit and come up with innovative adjustments itself

China's central government, powerful as it is, does not possess the capacity to dictate how the economy performs.

This year is the last of the 12th five-year plan period. Despite all the worries about the slowdown of the Chinese economy, the planned target of 7.5 per cent GDP growth will certainly be fulfilled. During the first four years of the plan period, average GDP growth per year was 8.04 per cent. Even if the growth rate this year drops to 6.8 per cent, the economy will still enjoy an average growth rate of 7.79 per cent over the five years.

Twenty or thirty years ago, few people in other parts of the world would pay attention to any of China's plans. Things have changed. Observers around the world now have to figure out what new economic policies will be undertaken in China. It was the focus of attention at the IMF conference held in Lima earlier this month. The International Monetary Fund's chief economist, Maurice Obstfeld, pointed out that the global economy was at the intersection of three powerful forces, China's economic transformation, the related fall in commodity prices, and the impending normalisation of monetary policy in the United States.

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Obstfeld was right. The world cannot afford to ignore China's plans. Its success or failure will both have wide-ranging impact on other economies. The plenum this week will discuss how China is going to deal with fundamental structural changes. I can see at least five issues that should be addressed in the forthcoming plan.

First, China has adopted a developmental strategy very different from that of India. China has taken advantage of its abundant and cheap labour to produce and export labour-intensive goods. This has rapidly and directly created employment opportunities for large numbers of people migrating to cities from the countryside. India, on the other hand, has established a vibrant IT sector, which benefits the educated elite much more than the masses.

The drawback for China's strategy is that it now has to face fierce competition from other labour-abundant countries. This is forcing China to go up the ladder from labour-intensive to more technology-intensive manufacturing. Some of the proposals from the five-year plan will likely be related to how this transition can be done more effectively.

The second structural change is the transition from manufacturing and construction to the service sector. In 1980, services accounted for only 22.2 per cent of the GDP. Last year, its share rose to 48.1 per cent, surpassing the 42.7 per cent share of the manufacturing and construction sector. China's service sector probably will never be close to Hong Kong's 90 per cent share, but is bound to continue growing. An advantage of a large service sector, which is labour-intensive, is it can create a lot of jobs. Manufacturing may slow down. Possibly we will encounter long periods of disappointing purchasing managers' indices or low electricity consumption, but the decline in manufacturing can be offset by the expansion in services.

Third, China seems to be producing too much of certain goods, such as steel and coal. Excess capacity in production is a sign of inefficient resource allocation. When too much of some items is produced, there are likely shortages of funds in others. Serious pollution in many parts of China is an indication that not enough is being spent on environmental protection. Rebalancing productive capacities implies special structural changes. The five-year plan must consider new priorities. A greener environment should be one of those.

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Fourth, large-scale migration from rural areas to the cities has been a major source of economic growth in China. People previously living in the countryside can quickly improve their productivity once they can take advantage of what the cities can offer. In 1978, fewer than 18 per cent of the population lived in cities and towns. Last year, more than 55 per cent belonged to the urban population.

The sheer size of the migration has created mind-boggling problems. Large numbers of new jobs are constantly needed. Children left behind in the villages by their parents are often inadequately educated or protected. There are probably 60 million left-behind children in China. Urbanisation will continue for a long time to come. A good five-year plan should come up with proper methods to deal with all the problems created by the rapid pace of urbanisation, itself an important form of structural change.

Finally, the "One Belt One Road" initiative and the internationalisation of the renminbi are two open-door policy initiatives that China will undertake in the next five years. "One Belt One Road" can help China export part of its excess productive capacity in infrastructure and expands its global market for goods and services.

Meanwhile, the next step in making the renminbi an international currency is to get it included in the IMF's special drawing rights basket. The IMF is expected to decide on it before the end of the year. If the outcome is positive, China will be busy formulating policies that will further enhance the renminbi as an international reserve currency.

Hong Kong, being a free port with core competence in trade, logistics, and financial services, has unique capabilities to contribute to China's economic transformation. Beijing, however, may not even know how to make the best use of Hong Kong in this regard. The opportunities are there. Waiting for others to tell us what to do is a bad approach. If we want to benefit more from the five-year plan, we have to uphold our own entrepreneurial spirit and come up with innovative adjustments ourselves.

Francis T. Lui is a professor of economics at the Hong Kong University of Science and Technology