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China economy: A change of focus
COUNTRY BRIEFING (EIU ViewsWire)

FROM THE ECONOMIST INTELLIGENCE UNIT

After an unusually brief four-day plenary meeting, the Chinese Communist Party (CCP) has approved the outline of the next five-year plan (FYP), which sets out China's economic and social development goals for the period 2006-10. Specific details of the plan have not been released, but a communiqué issued after the meeting reveals a change of focus from previous FYPs, which have tended to prioritise economic growth and investment targets, to broader goals promoting sustainable economic development.

This change has been brought about by the exposure in recent years of the negative side-effects of the "growth at all costs" strategy, including income inequality and environmental degradation, that have contributed to growing social tensions. The plan reveals the strategies the CCP leadership hopes will combat these problems, principally by slowing economic growth to a "sustainable" level and addressing the inequalities that the last two decades of breakneck growth have brought about.

A new phase

Thanks to China's extensive market reforms over the last 25 years, plans of this type are no longer as important as they once were. (This point is made tacitly by the CCP's reference for the first time to a "five-year programme", rather than plan.) Still, the FYP is important in exposing the leadership's priorities. As the communiqué made clear, the CCP sees China entering a "crucial phase" of its economic development, after years of exceptionally strong GDP growth. This entails a change of focus from headline macroeconomic growth figures to addressing the side-effects of that growth, including income inequalities, pollution, rural poverty and social discontent.

This change of focus has been embodied in the headline policies of China's president, Hu Jintao, which form the basis of the 2006-10 FYP. For example, a key goal is the creation of a "prosperous society" by doubling China's 2000 per-capita GDP (of US$853) by 2010--one of the few concrete economic targets in the draft. This should help support Mr Hu's goal of creating a "harmonious society", especially if--as the plan envisages--more is done to ease the burden on rural areas and improve education, social-security provisions and living standards across China. This is to be achieved through the third of Mr Hu's key ideas, "scientific development", for instance by improving energy efficiency and raising standards of technical and scientific education ("scientific development" goes beyond just science, however, covering all development that moves towards a harmonious society). Over the next five years the emphasis will very much be on quality of economic growth rather than quantity.

The underlying motive is the preservation of the authority of the CCP, which has been challenged in recent years through growing social instability--much of which can be traced to agitation by sections of the population that have not benefited from China's rapid economic growth. (The government has estimated that in 2004 some 3m people participated in around 74, 000 protests, up from 10, 000 in 1994.) In this context, the communiqué mentioned the promotion of "social fairness" and emphasised the protection of vulnerable elements of society. In the next five years China's leaders also aim to establish a more robust social-security system, especially with regard to healthcare and pensions, while aiming to improve overall living conditions and enhance job creation in rural and urban areas.

Notably, the FYP pays more attention to China's human resources than previously, a change of emphasis from the growth-first priorities of previous plans. A key facet of this is education: the plan aims to popularise and strengthen compulsory (and free) education for a minimum of nine years. As part of the broader goal of moving the economy up the value chain--and turning Chinese enterprises into global competitors--the communiqué also mentioned the promotion of key specialities and talents among the workforce, including administration, enterprise management and technology. This aspect of the "scientific development" of China's economy will be accompanied, the plan envisages, by improved energy efficiency--the first time that this has been mentioned in such a document.

Implications for growth

The details of the FYP will not be finalised (and certainly not published) before it is approved by the National People's Congress (NPC) in March 2006. Until new policies are put into practice it will be difficult to speculate as to its impact on the economy. However, the few figures in the plan's outline suggest that China's leaders would tolerate a slowdown in the headline growth rate in order to achieve the broader goals for sustainable development and "social fairness".

This can be demonstrated by looking at the headline goal of doubling 2000 per-capita GDP by 2010. In comparison with the economic growth of the last few years, this seems like a modest target. For real per-capita GDP only to double from 2000 to 2010 would mean the annual average real GDP growth rate would have to be just 6.9% from now until 2010. However, it could be higher than this--the 10th FYP, for 2001-05, for example, targeted GDP growth of 6-7% per year, whereas growth has actually averaged 8.7% during the period (including the Economist Intelligence Unit's forecast for 9.3% growth in 2005). We expect China's GDP to grow by an annual average of 7.3% to 2010.

(It is notable that China's official People's Daily newspaper, quoting the State Council, used the nominal figure for 2000, US$853, when reporting the goal of doubling 2000 per-capita GDP by 2010. If it does not assume a fixed exchange rate, the expected appreciation of the renminbi over the next five years would mean overall economic growth would have to slow even more dramatically for per-capita GDP only to double in US dollar terms by 2010. According to our forecasts, nominal GDP per capita will be US$2, 658 in 2010.)

If China's authorities do not expect the per-capita GDP target to be overshot, they must expect a sharper slowdown than we are envisaging. In fact, such a slowdown is not likely, or even intended. China's leaders will certainly not want to engineer a swift deceleration, and they are unlikely to roll back the market reforms of the past two decades that have provided the basis for such growth--despite the more obviously socialist elements of the new FYP. However, it does perhaps demonstrate that the government is prepared to brave lower headline growth figures to achieve the broader social aims outlined in the FYP and in the president's policy goals.

The only other concrete figure connected to the FYP in the communiqué concerns energy efficiency. Currently China has one of the world's worst ratios for consumption of energy per unit of GDP generated; the government is aiming to cut by 20% from this year's level the energy required for each unit of GDP by the end of the FYP. This will entail the closure of less efficient energy producers and the promotion of more efficient ones, a goal to be pursued in tandem with the promotion of renewable energy sources. This will be boosted by supporting legislation like the Law on Renewable Energy Sources, which will come in from January 1st 2006 and will commit China to producing 10% of energy from renewable sources (not including large-scale hydro-power) by 2020, and forcing power generators to buy renewable-based energy. Promoting such "green GDP" measures, and cracking down on enterprises that flout tighter environmental regulations, could also lead to slower GDP growth through the period of the 11th FYP.

Future problems

A shift in economic planning of this nature will not necessarily be easy, especially as for over 20 years China's leaders at the national and regional level have been focused on achieving brute economic growth. As we have already noted, the priorities of the next FYP could lead to contradictions that will not be easily resolved. For example, the drive to improve environmental standards and the quality of GDP growth will lead to growing clashes between central and local officials. Local officials' revenues still depend on maximising output, and to date they have tended to side more often with offending companies than with the affected local population when disputes arise. (However, the brevity of the recent plenum in comparison to previous such meetings--which typically lasted two weeks or so--might suggest that problems in centre-regional relations were worked out in advance, and that the main thrust of the FYP has received broad support.)

Despite the many doubts that can be raised about the FYP's practical goals, its presentation as a programme to narrow social divides is nevertheless crucial. Recent years have seen growing protests among those who have lost out in China's rush for economic growth, and rising disenchantment with CCP officials who claim to represent the masses but increasingly tend to side with business. If the government is to improve political stability, it must persuade these disenfranchised elements that the benefits of growth can be shared more evenly. The tone of the FYP shows that policy will continue to be targeted at achieving this goal.

SOURCE: ViewsWire Asia

© The Economist Intelligence Unit Limited 2004. All rights reserved.

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