Investors are optimistic that China's new five-year blueprint will support ongoing development, but reform imperatives may need to be re-prioritized to meet the proposed growth target.
The draft outline of the Five-Year Plan, China's 13th since 1953, was unveiled on March 5. It will be finalized on March 16, when the national legislature annual session draws to a close. With an ambitious "above 6.5 percent" average growth target for the period, it is obvious China does not want to miss its two long-hoped-for targets: Realizing "a moderately prosperous society in all respects" and doubling the size of its economy and per capita income by 2020 from the 2010 baseline.
The growth target is in line with a call by President Xi Jinping in November, when he said "a minimum 6.5 percent annual average growth" is needed to ensure these goals will be met before 2020. Achieving such growth will not be easy. On the one hand, China is trading quantity for quality; on the other hand, problems such as industrial overcapacity, a backlog of unsold houses, mounting government debt and subdued global demand cannot be solved overnight. The difficulties go beyond realizing admirable economic expansion.
Racing toward the proposed targets without compromising the government's reform promises may be more difficult. Economic pundits have long hoped that China can abandon its obsession with growth speed and give itself breathing space to address other priorities, such as restructuring state-owned enterprises, curbing wasteful investment and environmental protection.
Xi's government has shown greater tolerance for slower growth, as evidenced by a consistent downgrading of GDP targets since 2013 when he assumed presidency. This year's growth target is within the range of 6.5 and 7 percent, slowing from last year's aim of "around 7 percent." The central government has also reduced the weighting of GDP when assessing the performance of local officials. The latest proof of commitment to reform: China will lay off 1.8 million workers in the "zombie enterprises" of the bloated coal and steel sectors. The government has earmarked 100 billion yuan (15.3 billion U.S. dollars) to help those workers reestablish themselves.China's achievement over the past decades is little short of a miracle and it will take the same determination to tackle some of the unfettered side effects.
"Dramatic development causes pervasive problems, and China is confronted with contradictions and challenges," Robert Lawrence Kuhn, an international corporate strategist, told Xinhua. In an ideal scenario, new growth drivers grab the baton from old ones and propel growth seamlessly. However, Domestic consumption and services are not mature enough to pick up the slack.
Michael Spence, a Nobel prize winner in economics, told Xinhua while the biggest challenge is to keep growth in the neighborhood of 6.5 and 7 percent before 2020, the completion of structural changes and supporting reforms are more important. While it remains to be seen how China will balance growth and reforms, investors are excited by a new wave of opportunities brought by the country's yearning for quality growth. Supply-side reform, innovation, technological upgrades, market competition, more efficient state-owned enterprises and low fossil-fuel dependency have all been given pride of place in the latest five-year plan. China's expenditure on research and development in the next five years will be 2.5 percent of the GDP, up from 2 percent last year. This increased investment will support sophisticated projects such as deep space exploration and robotics. China's emphasis on innovation-driven growth has particularly cheered other innovative economies.
"The United Kingdom offers a mature, proven system that promotes innovation and our two countries can take cooperation to a new level," Jeff Astle, executive director of the China-Britain Business Council (CBBC), told Xinhua.
A report on the "Made in China 2025" initiative for British companies to work with Chinese companies will be released at a CBBC forum on innovation later this month in the port city of Tianjin. Chen Qihua, vice president of Caterpillar Inc. and chairman of Caterpillar China, said the higher premium China has placed on innovation, smart manufacturing and energy saving means more collaboration opportunities for the company. "We are optimistic about China from a long-term perspective," Chen said.
Given the inherent hit-or-miss nature of innovation, however, patience is also advised. "Innovation doesn't work the way low-cost manufacturing does," Kuhn said. "Innovation cannot be legislated. An innovation-based economy must accept failure as a necessary part of the process." "The most effective and robust policy to facilitate China's transition is greater competition," he said.
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