Rule of Fives

By Li Jia

China has been working on its 13th-Year Plan.

“Five years ago, Nokia dominated the market, Steve Jobs was still with us, and we did not yet have WeChat.” Chinese netizens recently circulated this post on social media to express surprise at the difference five years can make in our lives. Now, China’s ruling party has unveiled an ambitious vision for the country’s next five years – which, as any Chinese netizen will tell you, is a long time in such a rapidly changing society.

On November 3, 2015, the Communist Party of China (CPC) described the coming five years as a “set point” to achieve its goal of building a “moderately prosperous society” by 2020. “Moderately prosperous,” for China’s macroeconomic planners, means doubling official 2010 figures for both GDP and individual personal income. The document in which this pledge was made, “Proposal on Formulating the Thirteenth Five-year Plan (2016-2020) on National Economic and Social Development,” is a guideline for the drafting of the 13th Five-year Plan which will be approved by the National People’s Congress, China’s top legislative body, in March 2016. The proposal was officially adopted at the Fifth Plenary Session of the 18th CPC Central Committee, held in Beijing in October 2015.

China’s growth story can no longer be taken for granted. It is not realistic for the national economy to rely on fragile and volatile overseas markets. Further exploiting domestic demand will take time. The environmental cost of development and the rapid depletion of resources are both beginning to bite. Government and corporate debt is piling up. Chinese President Xi Jinping has acknowledged that all these factors will contribute to uncertainty in the next five years.

According to Chinese Premier Li Keqiang, in an article published in Party mouthpiece People’s Daily on November 6, “mediumhigh speed” growth, rooted in “medium-high quality” will be key in achieving the government’s economic goals. The government is hesitant to set a specific compulsory figure that will constitute “medium-high” speed growth. Economists have made projections on a GDP growth spectrum ranging from 5 to 8 percent, and have recommended staying flexible rather than fixating on an exact figure. There is consensus among economists, policymakers and the public that the real pace in the end will depend on the progress of economic reform. In this context, five cornerstones have been highlighted in this so-called “double medium-high” model: innovation, coordination, green growth, opening-up and inclusiveness.

Old Story
At the top level, there seems to be no division or ambiguity on what reforms should be made and how they should be implemented. The momentum of reform, however, remains a point of contention. The idea of upgrading the quality of China’s growth was first proposed by policymakers some 20 years ago, and was later enshrined in the Party’s Ninth Five-year Plan (1996-2000), which called for the more efficient use of resources, more technical innovation and fairer competition, rather than a continued dependence on huge investment and cheap labour.

Progress, however, was too slow, and overreliance on massive investment became even more consolidated in the years after this agenda was set, according to Wu Jinglian, an economist with the Development Research Centre of the State Council, speaking at a seminar held on October 25 by the Centre for Industrial Development and Environmental Governance at Tsinghua University. Wu added that academic researchers and policymakers later agreed that this failure to enact sufficient reform was rooted in systemic barriers, and that the problem could only be addressed by the programme of marketoriented reforms pledged in a CPC decision issued in 2003. As a result, upgrading China’s economy remained a priority in the Party’s 11th and 12th Five-year Plans (2006 2015). Nevertheless, that same decade witnessed the stagnation of the national economic reform agenda. It is widely believed that the extraordinary growth seen in the wake of China’s WTO accession, which paved the way for China to claim the title of the world’s secondlargest economy in 2010, largely resulted in complacency.

A sweeping reform package under the banner of giving the market a decisive role in China’s economy for the first time was unveiled at the Third Plenary Session of the 18th CPC Central Committee at the end of 2013. This pledge immediately ignited very high expectations for renewed, dynamic reform. New steps and concepts designed to empower the market have been announced one after another ever since, including trial projects involving opening-up, financial liberalisation, reduction of administrative red tape for entrepreneurs, restructuring Stateowned enterprises (SOEs) and overhauling rural land transfer systems. There are now roadmaps for building a “smart” manufacturing sector, and encouraging development in China’s emerging service sector.

The market has acknowledged this progress. The registration of new companies is surging, and the service sector has overtaken both manufacturing and mining in terms of its prominence in the national economy. Caps on interest rates have been removed. Government accounts have been placed under stricter legal scrutiny. The Chinese yuan is gradually becoming more international. Hundreds of billions of dollars’ worth of utilities projects have been opened to private investment.

However, progress has not been strong enough to disperse concerns over the apparent lack of effective implementation of major reforms. Investors are complaining that the stock market chaos in June and July was partly caused by a discrepancy between the progress of reform on the ground and high expectations. At a forum sponsored by media group Caixin on November 7, Zhang Junkuo, vice director of the Development Research Centre of the State Council, recognised that the process of forcing moribund enterprises out of the market had not moved fast enough. These so-called “zombie enterprises” are mostly SOEs or companies with close ties to the government which enjoy privileged access to market resources. Analysts have repeatedly warned that monetary and fiscal reform policies will fail to boost growth so long as these zombie enterprises are permitted to drain the national coffers.

China’s evident slowdown and the central leadership’s commitments regarding national prosperity were expected to exert further pressure on economic planners to speed up reform. Both Xi Jinping and Li Keqiang have stressed in their speeches and articles on the 13th Five-year Plan that China has to avoid the “middle-income trap.” In the past few years, speculation over China’s level of exposure to this trap has sparked intense controversy among analysts. Acknowledgement of such a risk in the official discourse of paramount leaders has been interpreted as proof of the urgency of the Party’s reform agenda. The average Chinese citizen is some US$5,000 a year shy of membership to the international high-income club, members of which must hold at least US$12,736 Gross National Income (GNI) per capita.

In 2012, the World Bank estimated that 101 economies had entered the middle-income group by 1960, but only 13 of these managed to upgrade to the high-income club by 2008. In his People’s Daily article, Li Keqiang explicitly stated that the failure to transition to a more efficient, more inclusive growth model is the lesson that China had to learn from countries already languishing in the middle-income trap. Li’s statements are in line with the original definition of this trap, and, even if many economic observers reject the middle-income trap as an invention of the World Bank, China’s premier’s analysis of the best escape route aligns with the general consensus on the state of China’s economy.

At the press conference in Beijing on November 9, Yang Weimin, vice director of the CPC Central Committee’s Central Leading Group on Financial and Economic Affairs, noted that the country’s economic performance in the past two years had already proved that the “old path” was no longer viable, adding that the central leadership’s 2020 prosperity target was “irrevocable.” The phrase “window of opportunity” has become popular among senior Chinese officials and analysts when stressing the urgency of restructuring the economy over the next five years.

While continued adherence to an obsolete growth model continues to erode decades of gain, the benefits of reform look increasingly attractive. According to the calculations of Cai Fang, vice president of the Chinese Academy of Social Sciences, effective implementation of reform measures could add 1 or 2 percentage points to the national growth rate. In an exclusive interview with ChinaReport’s Chinese edition, Cai described reform of the household registration system, or hukou system, for example, as “one stone, three birds,” – by relaxing access restrictions on migrant workers seeking urban public services, he argues, a more stable labour supply will be secured, leading to greater transfers of labour to more productive sectors, boosting consumption.

Breaking SOE monopolies and encouraging private entrepreneurship are, many believe, complementary concepts. Liu Kefeng, general manager of the Zhongguangcun Software Park in Beijing, China’s national base for the domestic software industry, told ChinaReport that the huge potential for innovation and entrepreneurship in China has yet to be exploited, adding that SOE reform would make a big difference.

There is hope that these lingering problems would be resolved through the CPC’s 13th Five-year Plan. Right before and after convening its Fifth Plenary Session, the central government decided to build a “residence registration” system around the country to allow migrant workers in steady employment to access urban public services such as healthcare and education. The plan also advocates allowing the market to set prices for competitive elements of the supply chain in the transportation, telecommunications and energy sectors. A market access “negative list,” which would bring China’s economic planners in line with their international peers, will be launched in December and implemented nationwide in 2018.

As the title of the latest Five-year Plan indicates, it does not focus solely on developing the “national economy,” but also prioritises “social development.” Indeed, both the Party’s vision for 2020 and the measures undertaken, like household registration reform, are not only economic, but social as well. This is also true for the plan’s five core underlying principles of innovation, coordination, green growth, opening up and inclusiveness. Innovation in particular, while identified as the core of China’s new growth path, has been highlighted by analysts as a term applied more forcefully to “systems” as opposed to just science and technology.

This is why calls are growing for the central leadership to seek reform dynamics from the lower levels of the economy and from society as a whole, rather than purely from political resolutions made at the top. In an interview published on October 30 in the 21st Century Business Herald, Liu Shangxi, director of China’s Research Institute for Fiscal Science, a think tank under the Ministry of Finance, stressed that “social organisations” should be encouraged to provide more healthcare and education services, and that “industrial guilds” should play a bigger role in disciplining the market. In recent years, China’s public has consistently called for more government intervention when problems have arisen in the fields of environmental protection, food safety or product certification. Some analysts have begun to realise that society itself could and should be a part of the solution to these problems.

Zhang Junkuo believes that a major reason for laggardly reform in the past two years has been a lack of incentives to innovate at the local level. He argues that it is important to show more tolerance for trial projects initiated by local governments. A major contributor to reform in the past decades has been these local-level experiments, rather than reform by central diktat. Concerns are growing among Chinese analysts that further delay in undertaking legal reform rather than continuing to prioritise Xi’s anti-corruption drive could deter local officials from attempting such experiments. Inaction among officials has already become a headache of the central government recently. Apparently the solution is not only Party discipline, but clear legal definition of responsibilities and misconduct.

Even in terms of encouraging an innovation-driven, efficient economy, economists have stressed that the main obstacle lies not in research and development, but in social policies. Wu Jinglian noted that the highly bureaucratic education system is hindering the supply of good human resources. Reform in this area, along with legal reform, has been slow, he acknowledged. In a joint report published in the October issue of the journal China Finance 40 Forum, Huang Yiping and Wang Daili, researchers with the Peking University National School of Development, advocated greater government investment in education, training, basic research and intellectual property protection to encourage innovation, rather than simply underwriting growth in select sectors. In the big data industry, for example, the gap between leading Chinese and international service providers lies in basic mathematical methodology, said Liu Kefeng.

Like any transitional economy, the road to a better future cannot be summed up in an algorithm. It is a complex social process with innumerable factors. Social consensus on reform is not always present. China is lucky enough to have this key source of impetus right now, and the country cannot afford to waste it.

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