14th five-year plan shows lower expectations for China’s economic future

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Last week, China kicked off its largest annual political rally, the two sessions (lianghui). The first political documents and speeches from the Beijing meeting surprised many investors and political analysts with their caution and lack of ambition. The era of the pursuit of dizzying growth rates is clearly over. On the contrary, Chinese GDP growth is expected to be lower than expected this year and beyond. With sober, fiscally conservative planners now firmly in command of politics, Beijing is turning its attention to debt reduction and a disheartening structural reform agenda.

One of the first signs of change came when the annual report on the work of the government of Chinese Premier Li Keqiang published a surprisingly conservative GDP target of over 6%. Many financial analysts, according to the projections of the International Monetary Fund, expected 8% or more.

It comes after last year’s almost unprecedented decision to set no growth targets, using the COVID-19 pandemic as an excuse. Ahead of this year’s two sessions, heated debates took place in Beijing over whether to revert to the old targeting approach. Some economists have argued that the targets help motivate local officials and provide a boost to economic activity. Others called for removing them altogether and focusing on other measures such as employment.

Last week, China kicked off its largest annual political rally, the two sessions (lianghui). The first political documents and speeches from the Beijing meeting surprised many investors and political analysts with their caution and lack of ambition. The era of the pursuit of dizzying growth rates is clearly over. On the contrary, Chinese GDP growth is expected to be lower than expected this year and beyond. With sober, fiscally conservative planners now firmly in command of politics, Beijing is turning its attention to debt reduction and a disheartening structural reform agenda.

One of the first signs of change came when the annual report on the work of the government of Chinese Premier Li Keqiang published a surprisingly conservative GDP target of over 6%. Many financial analysts, according to the projections of the International Monetary Fund, expected 8% or more.

It comes after last year’s almost unprecedented decision to set no growth targets, using the COVID-19 pandemic as an excuse. Ahead of this year’s two sessions, heated debates took place in Beijing over whether to revert to the old targeting approach. Some economists have argued that the targets help motivate local officials and provide a boost to economic activity. Others called for removing them altogether and focusing on other measures such as employment.

In the end, Beijing compromised. In announcing his conservative GDP target, Li noted that he would “allow [China] devote all its energy to promoting reform, innovation and high-quality development. It also set targets to reduce the central government’s budget deficit from 3.6% of GDP in 2020 to around 3.2% of GDP in 2021 and announced its intention to reduce the emission allowance of special bonds of local communities, the crucial mechanism for financing infrastructure development. Beijing also removed 1,000 billion yuan ($ 140 billion) of special treasury bonds issued last year in response to COVID-19. As US President Joe Biden and his administration double down on pandemic fiscal stimulus, China is quickly phasing it out.

Another major sign of Beijing’s shift in strategy came on Friday, the second day of the two sessions, when the government unveiled another major document: the draft 14th five-year plan, which will be the strategic plan for all aspects of national development. until 2025. Previous plans included explicit growth targets. This one did not. The omissions confirmed that the so-called “fiscal hawks”, who want to tackle China’s growing levels of public and private debt, have won the internal policy debate.

The two most prominent hawks are the Chinese economic tsar, Vice Premier Liu He, and the head of the China Banking and Insurance Regulatory Commission, Guo Shuqing. The “doves,” including senior officials from the National Development and Reform Commission (NDRC), were less concerned about China’s growing debt level, now equal to 280 percent of GDP. They wanted a GDP target as high as 8%, which would surely be fueled by even more infrastructure spending.

The government’s labor report and the draft five-year plan also revealed that Beijing is struggling to cope with some long-standing structural issues. Inequalities between provinces and regions continue to grow, while the northern Rust Belt provinces stagnate. Compared to previous years, this year’s government activity report devoted much more attention to these domestic imbalances. Beijing has also recognized its “low fertility trap”, marked by a 15% drop in births since last year. (The birth rate has fallen to its lowest level in seven decades, despite a series of measures to encourage families to have a second child.) Underlying structural trends like these are all deeply problematic for Beijing: a declining marriage rate, financial disincentives to have more than one child. Li pledged to “work towards achieving an appropriate birth rate,” but provided few details and no original ideas.

Chinese planners are also dragging their feet on much-needed household registration reforms (hukou) system. Hukou is the Chinese government’s tool for managing the internal movement of its 1.4 billion people. The system governs the hundreds of millions of migrant workers in the country – about 40 percent of the urban workforce – who move from rural areas to cities in search of work. The latest five-year plan promises new reforms that would effectively lift most of the hukou requirements for rural migrant workers in cities of less than 5 million people. (The most sought-after mega-cities, such as Beijing, Shanghai, and Shenzhen, would keep their points-based eligibility system.)

On the contrary, these reforms are likely to create more headaches for civil servants and increase economic inequalities. Educated and richer migrants will earn hukou in richer cities with better public services. The poorest migrants will be stuck in smaller towns with tighter public finances and poorer social services. Some rural workers do not want to trade their rural hukou for an urban hukou at all, as it would mean the loss of their precious rural land.

Both sessions were also a disappointment on environmental issues. State planners have committed to ambitious pollution control targets, but they have not promised to cap total energy use and even left the door open for increased coal production. An NDRC report even appeared to contradict Li’s, stating that China “would systematically increase [its] ability to secure coal supply ”and focus on expanding“ clean coal ”, as well as nuclear and renewables.

Unlike the boastful “wolf-warrior diplomacy” – a more aggressive and offensive foreign policy stance designed to exploit domestic chauvinism – which characterized much of Chinese public communications last year, the government work report and The 14th Five-Year Plan reveals that China believes that it is still badly in need of foreign capital and know-how and that it has failed to deploy its own internal research and development efforts.

In particular, China has fallen far behind its own goals of becoming self-sufficient in semiconductor manufacturing. The famous “Made in China 2025” report aimed to have China produce 70% of its annual chip consumption in the domestic market by 2025. But last year, the country produced only 6% of that. he was using. China’s Ministry of Commerce announced new grants to attract overseas-funded R&D centers while reducing domestic R&D spending targets to 7% (from a previous five-year average of 11.8%).

Such subsidies are probably not enough to attract foreign chipmakers. These companies are wary of Chinese industrial espionage and are under pressure from Washington to limit technology transfers to Beijing. Although China has steadily improved its intellectual property protection regime, with new amendments and intellectual property courts that came into effect in June, its latest laws protecting foreign investors remain inadequate and leave little recourse to foreign companies that their technology is being stolen.

Meanwhile, China may have crushed the COVID-19 pandemic at home, but the specter of the virus will hang over the Chinese economy longer than in the United States. This is in part because China is lagging behind in rolling out its vaccines. By the end of February, only 4% of China’s 1.4 billion people had received at least one dose. Zhong Nanshan of the National Health Commission, China’s most trusted public health expert, recently told a Brookings Institution forum that the government wants 40% of the population to have received at least one dose. by July. But Chinese vaccines are less effective than Western vaccines, and few Chinese citizens have gained immunity to COVID-19 through natural infection. The country will therefore need much higher vaccination levels than the United States and Europe to achieve the same protective effect. Beijing admitted last week that it is unlikely to ease border controls this year and that collective immunity is unlikely to be achieved before mid-2022.

For years, Chinese planners have focused on measures of GDP, assuming the country could get out of its domestic problems rather than face them with painful reforms. China has already surprised the world, responding quickly and effectively to the 2008-09 global financial crisis, and then finally to COVID-19 last year. However, China’s “growth first” era is drawing to a close.

The Chinese economy has firm hands for now. While key policy makers are aware of the challenges ahead, they have yet to demonstrate the vision for an adequate response and are perhaps betting too much on a recovery on the demand side. With consumption remaining the weakest link in the economy, growth could be slower than even officials expect beyond 2021. This could ultimately empower budget doves and signal the return of growth. driven by debt.


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