Beijing is on track to meet its five-year goals
Andrew Leung says the tasks ahead are daunting, and observers may be sceptical, but past performance suggests that China will meet its economic and financial targets
China’s five-year plan to 2020 aims to shift to higher value-added and more sustainable development, doubling 2010’s national income by 2020. Many China-watchers remain unimpressed. Some say the current model is unsustainable without far-reaching structural reforms while Beijing appears to muddle through with financial stimulus. The way forward seems pointed more to sunset than renaissance. Let’s try to see through the mist.
According to the premier’s latest work report, GDP grew by 6.9 per cent to US$10.3 trillion in 2015. A total of 13.12 million urban jobs were created, with a 7.4 per cent rise in per capita disposable income. Utilised direct foreign investment amounted to US$126.3 billion while outbound foreign direct investment grew to US$118 billion. This picture of slowdown does not seem to signal impending paralysis.
Let’s turn to consumption. Consumption seemed to have stalled from 38.3 per cent of gross domestic product in 2006 to 38.2 per cent in 2015. This comparison, however, ignores the expansion of the economy from US$2.3 trillion in 2005 to US$11.3 trillion in 2015. A similar percentage of a doubled economy equals tremendous growth. Economic slowdown notwithstanding, evidence points to considerable pent-up demand. China’s “Singles’ Day” online shopping event in November 2015 saw US$9.3 billion splurged in 12 hours.
Much has been made of “supply-side reform”. What this means is cutting excess capacity, de-leveraging debt, streamlining bureaucracy, reforming state-owned enterprises, liberalising currency and interest rates, and providing better social security and a greener economy.
China is drastically reducing excess coal capacity. This five-year plan is the greenest yet, aiming to deliver 45 per cent carbon intensity reduction by 2020.
As for state-owned enterprises, China wants them to become internationally competitive, playing the transitional role of South Korea’s chaebols. A plan was recently launched to transform 112 state firms into 40 bigger conglomerates with a view to eliminating duplication, enhancing synergy and streamlining corporate efficiency. The recent merger between state-owned trainmakers CNR and CSR Corporation is a case in point. More such mergers can be expected.
Debt, however, remains a ticking time-bomb. A looming mortgage crisis is not inevitable, as gearing remains low and measures are introduced to curb speculation. Corporate debt is more worrying. Central banker Zhou Xiaochuan (周小川) has alluded to substituting it with equity financing. That cannot be effective without a further opening of China’s capital market, supported by sophisticated regulatory infrastructure. Recent reflex actions notwithstanding, China’s learning curve must not be conflated with resisting, let alone rolling back, financial reform.
With shrinking demographics, overcoming the “middle income trap” without jump-starting productivity seems an impossible task. A great deal depends on the quality of the workforce. China’s education spending has grown by 20 per cent annually since 1999. It is poised to have some 200 million graduates by 2030, more than the entire current US workforce. Moreover, China is on track to become the world’s top research and development spender by around 2019. Its human capital is further enriched by overseas Chinese student returnees. Since 1978, a total of 3.5 million Chinese have studied abroad. The total return rate to 2014 stands at 74.5 per cent, thanks in part to an “overseas professional returnees programme” with attractive terms.
According to the Pew Research Centre, while corruption, pollution and inequalities remain Chinese people’s top concerns, there is widespread belief that standards of living have improved. Warts and all, how the country is managed seems to retain majority support. There is no mileage for regime change.
Do I want to bet on China’s chances of fulfilling the five-year plan? Probably not, as the tasks ahead are herculean and many black swans could appear. But considering its track record, I am not convinced that China can only sleepwalk into the sunset.
Andrew K.P. Leung is an independent China strategist. [email protected]