China’s Five Year Plan 2016-20 aims to shift to higher value-added and more sustainable development, doubling 2010 national income by 2020. Many China-watchers remain largely unimpressed. Some conclude that China is now stuck between a rock and a hard place. The current model is unsustainable without far-reaching structural reforms while Beijing remains nervous and appears to muddle through with financial stimulus. The way forward seems pointed more to sunset rather than renaissance.
Let’s try to see through the mist.
According to the Premier’s latest Work Report in Beijing, GDP grew by 6.9% to $10.3 trillion in 2015. 13.12 million urban jobs were created, with 7.4% rise in per capita disposable income and a reduction of 14.42 million rural persons below the poverty line. Utilized direct foreign investment amounted to $126.3 billion while outbound foreign direct investment grew to $118 billion. This picture of slowdown does not seem to signal impending paralysis.
Let’s turn to consumption and services.
Consumption seemed to have stalled from 38.3% of GDP in 2006 to 38.2% of GDP in 2015. This comparison, however, ignores the expansion of economy from $2.3 trillion in 2005 to $11.3 trillion in 2015. A similar percentage of a doubled economy equals tremendous growth. Chinese private consumption growth over 2005-14 bested major economies, averaging 8.9% annually compared with 7.3% for India and 1.8% for the United States. Click here
Economic slowdown notwithstanding, evidence points to considerable pent-up demand. China’s “Singles' Day” online shopping in November 2015 splurged $9.3bn in 12 hours. Outbound Chinese tourists number 100 million annually. Galleries Lafayette in Paris continued to report strong sales to Chinese tourists, which accounted for 33.7% of sales in 2013-14. An addition of 260 million affluent Chinese consumers is expected in the next decade. Click here Additionally, McKinsey & Co estimates that China's working and retirees will account for 18% and 10% respectively of global urban consumption growth from 2015-30.
As for services, this sector started to exceed the contribution from industrial production in 2012. Output of services as a share of GDP in 2015 is estimated to total 49.2%, compared to 41.9% for industry. Click here
Much has been made of “supply-side reform”. What this means are de-stocking excess capacity, de-leveraging debt, streamlining bureaucracy, reforming state-owned enterprises, liberalizing currency and interest rate, and providing better social security and a greener economy.
China is drastically reducing excess coal capacity in developing a greener economy. China's coal consumption fell by 2.9 % in 2014 and by 5 % in 2015. As a result, global CO2 emissions may have declined by about 0.6 % in 2015, an astonishing outcome, if confirmed. China reduced its energy consumption per unit GDP by nearly 20% from 2006-2010, and a further 16% reduction by 2015. At this rate, China may achieve her Paris climate commitments well before the 2030 target. Click here and here This Five-Year Plan is the greenest ever yet, aiming to deliver 45% carbon intensity reduction by 2020. Click here
There is likewise much de-stocking in the steel industry, using online trading to help speeding up the process. Click here
It is therefore no longer meaningful to correlate China’s growth with electricity consumption, a source of skepticism with China’s real GDP growth rate. The former “Li Keqiang Index” has become obsolete. Click here
As for state-owned enterprises (SOEs), China wants them to become internationally competitive, playing the transitional role of South Korea’s chaebols. A plan is recently launched to transform 112 SOEs into 40 bigger conglomerates with a view to eliminating duplication, enhancing synergy and streamlining corporate efficiency. The recent merger between stated-owned train-makers CNR and CSR Corporation is also a case in point. More of such mergers can be expected.
Debt, however, remains a ticking time bomb. As for household debt, a looming mortgage crisis is not inevitable as gearing remains comparatively low and stringent measures are introduced to curb speculation. Corporate debt is more worrying. China’s central banker Zhou Xiaochuan has alluded to substituting it with equity financing. That cannot be effective without a further opening of China’s capital market, supported by sophisticated regulatory infrastructure. This liberalization will also enhance free capital flow needed to boost the renminbi’s global status, on which China sets great store. Recent reflex actions and immature market expediencies notwithstanding, China’s learning curve must not be conflated with resisting, let alone rolling back financial reform.
With shrinking demographics, overcoming the “middle-income trap” without jumpstarting productivity seems an impossible task. A great deal depends on innovation and quality of the workforce. China’s education spending has grown by 20% annually since 1999. Adding some 7 million university graduates a year, China is poised to have some 200 million graduates by 2030, more than the entire US current workforce. Moreover, China is on track to become the world’s top R & D spender by around 2019. China’s human capital is further enriched by overseas Chinese student returnees. 364,800 students returned to China in 2014, an increase of 3.2% over 2013. Since 1978, a total of 3.5 million Chinese have studied abroad. The total return rate to 2014 stands at 74.5%, thanks in part to an “overseas professional returnees program” with attractive terms. Click here
According to the World Intellectual Property Organization (WIPO), China has been the world’s top filer of patents and trademarks every year since 2012, responsible for a third of all patents filed. While quantity does not equal quality and China still lacks Nobel Laureates, world-class Chinese entrepreneurial disrupters* are beginning to emerge to define the rules of e-commerce. According to a report in the New York Times, Chinese start-ups are poised to take leap in developing a driverless car.
(*China’s Disruptors – How Alibaba, Xiaomi, Tencent, and other companies are changing the rules of business, Edward Tse, Penguin Random House, UK, 2015)
What is more, China has been transiting from a model based on "Make in China", to "Created in China", through to "Owned by China". Recent examples include Wanda's 万达集团 acquisition of AMC and Legendary, one of United States' largest cinema chains and film studios; Flagship Entertainment Group 旗舰影业, a new joint venture between China Media Capital (CMC) 华人文化产业投资基金 and Warner Bros Entertainment for global film production and distribution; and the acquisition from KKR by Shandong Ruyi 山东如意纺织集团有限公司, one of China's largest textile producers, for a 70% stake in SMPC, a leading French fashion company.
Yes, China is clamping down on civil society. While charting a potentially turbulent course towards the 2020 goals, stability trumps everything else. Meanwhile, however, a new charity law has just been adopted to promote home-grown philanthropy. According to PEW, an independent public opinion research center based in Washington DC, while corruption, pollution and inequalities remain Chinese people’s top concerns, there is widespread belief that standard of living has improved. In 2008, 66% of Chinese said their personal finances were good. In 2015, 72% hold this view. Warts and all, how the country is managed seems to retain majority support. There is no mileage for regime change.
Do I want to bet on China’s chances of fulfilling the Five Year Plan? Probably not, as the tasks ahead are herculean and many black swans could appear. But considering her track record, I am not convinced that China is now so hamstrung that she can only sleepwalk towards sunset.
A much-abridge version of the above appeared as my Op-ed in the South China Morning Post of 29 March, 2016.
