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China readjusts to address its weaknesses

Five-year plan | China readjusts to address its weaknesses Anthony Harrington

The latest Chinese five-year plan recognises that the way the Chinese economy has developed so far, with a massive emphasis on exports, is unsustainable and that things need to change. In a report on China just before the new plan was revealed in mid-March, Deutsche Bank Research restated the point that many western economists have been making, namely that revaluation of the yuan, higher minimum wages and state investment in the healthcare system would be very beneficial in reshaping the Chinese economy.

As it happens, the 12th five-year plan simply repeated the message that the Chinese have been giving everyone who would listen for more than a year. There will be currency appreciation, but it will be a very softly-softly process. The only thing that is likely to change this is not US protests or loud comments about currency abuse – not something the US would do, of course – but rather, a sudden spike in food inflation which is severe enough to prompt the Chinese authorities to do something dramatic with rates.

Ramping up healthcare spending of course, makes tremendous sense as a way of rebalancing the economy away from a maniacal focus on exports and towards domestic consumption. It acts both as a stimulus to the economy and, more importantly, it is essential to get the ordinary Chinese family feeling as if there is a viable safety net out there. Without society providing a safety net people have to put together a savings pool that can tide them over rough times. When this pattern is repeated in millions of households, it generates uncomfortably high levels of savings, all of which could be ramping up consumer demand instead of funding government borrowing or serving as stuffing for mattresses.

One of the key features of the plan is the decision, announced by Prime Minister Wen Jiabao, that it was lowering its annual economic growth target from 7.5% to 7%. The precise figure is not particularly important. The Chinese regime has a habit of setting itself soft targets so that they can be comfortably exceeded, to the glory of everyone involved. So there may well be an overshoot by the time the plan has been turned into reality in five years or so. However, the point is that the perpetual cycle of 10% real growth year on year (10.3% in 2010) is now recognized as unsustainable, and that fact has been written into the script.

Also important is the emphasis given in the plan to the concept of environmental conservation. “We absolutely must not any longer sacrifice the environment for the sake of rapid growth and reckless roll-outs," Wen said, which sounds as though the Chinese mean business this time. The last few five-year plans had a little green-wash added to them, but the gap between pious statements and reality was massive. This time round, as the BBC noted in its write up on the Plan, “The authors of the plan (say) that all goals spelt out in the plan point towards a more mature market economy and a more clearly defined, significantly reduced role for the state in the economy.”

This will only work, of course, if those in charge of implementing the new five-year plan devise new ways of measuring local government performance, which do not emphasize growth targets as the only meaningful measure. The old adage that you get the behaviors that you measure and reward holds good in China, as elsewhere.

As the Guardian notes, composing a five-year plan for a $5 trillion economy and a population of 1.4 billion is no small feat, and requires a small army of officials and academics. While Soviet-style five-year plans used to draw forth derision from western academics, industrialists and analysts, more than a few commentators are now starting to see China’s ability to set a course for its economy as a competitive advantage – particularly when the plan actually has some traction in the real world. Governments in most western developed economies find that while they can write policy papers for parts of the economy, such as transport, or energy, it turns out all too often to be almost impossible to turn anything but a fraction of their content into reality.

Further reading on the Chinese economy, the Asian economy, and the five-year plan:

Tags: 5 Year Plan , China , Deutsche Bank Research , food price inflation , green agenda , inflation , sustainable , yuan appreciation
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