As of Thursday, the Communist Party of China (CPC) has concluded its 13th Five Year Plan (FYP), which will dictate economic and social policy for 2016-2020. For those who have been following the media buildup to the announcement, the occasion might come as a bit of a let-down: the details of the plan will not be released until the National People’s Congress, the country’s yes-parliament, approves it in March.
Yet the FYP already has enormous import for the country’s business climate. The state-owned enterprises are the first to be briefed on the economy’s new orientation, and the rhetoric and priorities they adopt are in turn signals that any business operating in the country watches and copies as quickly as possible. According to a source in Beijing who asked not to be named, the FYP “will be implemented in an instant.”
At the same time, however, the plan is the product of two and a half years of negotiations and comes at a particularly contentious time in China’s history. While American media blare with an election-season cacophony of slogans, hashtags, digs, retorts, rebuttals and counter-rebuttals, Chinese media convey an image of sober, technocratic calm (even when it is wrapped in pandering kitsch, as in the psychedelic twee-pop FYP explainer video that CCTV America released Tuesday). Don’t let the harmonious facade fool you: there are “four or five different factions” at play behind closed doors, according to the source in Beijing.
What unites these factions, aside from party affiliation, is a desire for bigger and better economic growth. Unfortunately, reality has intervened in the form of slowing industrial output, mounting debt, stock market turmoil, ecological sepsis, geopolitical tensions, currency-related growing pains, simmering domestic discontent at the lack of civil and religious freedoms, increasingly lopsided demographics, and growing international skepticism that the China Miracle can last another five years.
As the Economist points out, this last concern is especially crucial. The Soviet Union, from which China adopted the concept of the five year plan, barely embarked on its own 13th FYP, which would have covered 1991-1995. This fact has contributed to the sense that communist regimes—perhaps even ones as voraciously capitalist as the CPC has become since Deng—have an expiration date. The government aims to prove the doubters wrong.
So this FYP is especially important, and now that it’s out there, it’s worth mulling over a few key questions while we wait for a better look at the details.
Great Wall of China.
1. Will it set a reasonable growth target?
The central question, the one that has had markets sloshing around in anticipation, is the growth target. China’s third-quarter GDP growth came in at 6.9%, the worst showing since 2009 and the first time this millennium that growth has fallen below the target for a given five-year period. To make matters worse, few outside China much believe the number. Li Keqiang, currently the Prime Minister, told US diplomats that GDP figures are “man-made” in 2007, when he was Secretary of the northern province of Liaoning. He said he preferred to use electricity consumption, rail cargo volume and bank lending when assessing the provincial economy.
This story, which hit WikiLeaks in 2010, only fed into distrust of government data. Danny Gabay, co-director of Fathom Consulting puts Q3 2015 growth at 3%, based on Li’s own recommended metrics.
Growth, the cliché goes, is the state religion in nominally secular China. Now that other data, such as those Gabay consulted, indicate that growth is slowing, investors have worried that another five years with a 7% target could hamstring efforts to transition into a consumption-driven, middle-income economy—or “moderately prosperous society,” in the central government’s phrasing.
If officials are pressured to maintain recent decades’ blistering rates of expansion, the central and provincial governments may take on more debt, exacerbate industrial overcapacity, push through more unnecessary projects, fudge official data even more, and dig an ever deeper hole—a hole to America, as kids in China might say.
Thankfully, there are strong indications that the growth target will be more modest. On Sunday, Li told business leaders in Seoul that the country would expand at a pace of at least 6.5% through 2020. This is the minimum needed to double China’s GDP and per capita income from 2010 to 2020, so it is probably a hard lower limit. “New normal” has become a buzzword in Xinhua and CCTV reports on the FYP, described as “slower growth” and “re-balancing towards consumption and services.” But whether the FYP will reflect this new thinking is not yet certain.
2. Will it cut carbon emissions?
A study published by Berkeley Earth in PLOS One in August found that PM2.5, or particulate matter of 2.5 microns or less, is responsible for 1.6 million deaths per year in China. A slight exaggeration of a crude analogy included in the press release, though not the study itself, has yielded the pop science statistic of the year: breathing Beijing air is like smoking 40 cigarettes a day.
China has fueled a dirty boom using cheap coal. Under Xi, however, there are signs that the company is turning over a new leaf. In November the US and China agreed to a plan that would see China’s carbon emissions peak in 2030, by which time its share of non-fossil fuel energy generation will rise to 20%.
State media reports on the 13th FYP have mentioned environmental provisions. The source in Beijing sees “a wide, wide, wide exercise to develop electric vehicles, perhaps faster than America.” A Bloomberg report from September supports the idea that EV production might be a government priority in the next five years. While this push would not directly reduce coal consumption, the main source of the country’s pollution, it may slow the growth of China’s oil consumption, which according to the EIA was 17.2% between 2010 and 2013. China was the world’s second largest oil consumer at the end of that period, behind the US.
As for the viability of this EV manufacturing plan, the source in Beijing says, “the Party can make it happen.”
3. Will it spur innovation?
In January, Carly Fiorina told Caffeinated Thoughts, a Christian conservative blog, “yeah the Chinese can take a test, but what they can’t do is innovate.” That sentiment, fair or not, has long been widespread on this side of the Pacific. Now it is increasingly informing the reform agenda in China. According to the source in Beijing, “Chinese copy everything because for a long, long period there has been no innovation. Now there are many people in companies and schools across the world, and everybody is looking to make the next big thing.”
The source emphasizes one aspect of this process in particular: “China wants to develop a brand of anything […] they need to understand brand value and they understand that they need to understand that.” A few Chinese brands, such as Xiaomi and Weibo Corp (WB), have dimly entered the American consumer’s consciousness, but only as “China’s Apple” and “China’s Twitter.”
Having learned to reproduce Silicon Valley’s products and adapt them to Chinese consumers’ needs and tastes, however, it will not be too long before Chinese startups are producing truly new brands the whole world wants. If such innovation is a priority of the next FYP, change may come even faster. With their own brands to defend and foster, Chinese authorities will probably take a harder line on intellectual property protections.
Conclusion
Issues of debt, growth, innovation, energy and pollution will be hugely important for China in the next five years, along with a number of other challenges—demographic imbalances, a broken hukou system, tanking property prices, etc.
The newest FYP will signal Chinese authorities’ responses, if any, to these issues, but a coherent response on paper does not always yield the intended results. Johns Hopkins School of Advanced International Studies senior fellow John Lipsky recently commented at a Council on Foreign Relations meeting that the 12th FYP laid out a clear, sensible reform agenda: “It’s all there. Cautionary tale: a lot of that stuff was in the 11th five year plan. And it didn’t happen.”
With any luck, number 13 will be different.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.