Good Leap Forward

Central planning is alive and well. Next week, China’s government will formally adopt its new five-year plan. Last Saturday, March 5, the 118-page, 16-chapter blueprint was submitted to the National People’s Congress (NPC). The NPC, China’s legislature, meets every March to hear reports from the government, debate and pass major laws, and put forth proposals. Now that draft is being debated by the legislature’s 2,979 deputies, but there is little doubt that it will pass in almost unedited form before the conclave concludes on March 14.

This five-year plan, which covers 2011 to 2015, aims to shift the country from simply being the factory floor of the world (built on the backs of a cheap labor force) into a "moderately prosperous society." That means striving for a more varied economic structure, which officials hope will curb China’s worryingly high rate of income inequality.

The new plan — perhaps more accurately translated and understood as "guidelines" — puts forth a dizzying array of numerical targets. Many were repeated by Premier Wen Jiabao in his two-hour speech to the NPC last Saturday. Although somewhat numbing to the ear, all the rhetoric boils down to essentially three points:

First, China’s leadership is willing to accept modestly slower economic growth in exchange for higher quality and more sustainable growth. Hence, GDP is projected to rise at only 7 percent a year, down half a percentage point from the previous plan’s goal. (It should be noted, however, that China’s economy actually grew by 11.2 percent annually during the past half-decade.) Although we can expect numbers north of 7 percent through 2015, the plan at least signals that relatively lower growth would be acceptable if accompanied by restructuring.

What Beijing wants to do in place of relying on investment, low-wage manufacturing, and exports is develop more value-added products and services and encourage greater personal consumption. (This latter goal is consistent with the West’s desire to see a greater rebalancing of China’s economy to increase imports.) Hence, one goal of the plan is to raise research and development spending to 2.2 percent of GDP. This would be 0.4 percentage points higher than the 2010 figure, and it would push China above the average of around 2 percent in OECD countries. In keeping with policies of the last five years, in this plan China is encouraging a more assertive effort to register invention patents and promote emerging strategic industries. Prior to this plan, the government had already identified seven strategic sectors that would receive priority funding and support: alternative energy, biotechnology, new-generation information technology (such as cloud computing), high-end manufacturing, advanced materials, alternative-fuel vehicles, and conservation and environmental protection, including in advanced materials, transportation, and new energy.

Second, the plan strengthens efforts to adjust China’s energy usage and protect the environment. Some of the particular targets include: reducing the energy intensity of the economy by 16 percent, increasing the share of energy from non-fossil-fuel sources to 11 percent, and reducing the carbon intensity of total GDP by 17 percent by 2015. (These figures are roughly in keeping with targets of the previous plan; China fell 1 percentage point short of meeting the old 20 percent redution in energy-intensity target). The goals are also backed by substantial investments. At the same time, the plan sets a range of targets to improve the quality of China’s air, water, and soil, both urban and rural. Discharge of sulfur dioxide should drop 8 percent over the next five years, and ammonia nitrogen and nitrogen oxides by 10 percent. These targets all seem achievable if trends from the last plan continue. The identification of these goals as "hard targets" makes the government even more likely to push energy-intensive sectors and localities to comply.

And third, tying everything together, is greater attention to social needs. In the past, Beijing has stressed making the country stronger and creating a good environment for businesses, while giving lower priority to the personal needs and comfort of individual citizens, including those less well-off. A strong military, economic growth, and political stability are still top priorities, but efforts to better the livelihood of individuals is more prominent in this plan. Per capita income targets for both urban and rural Chinese have been raised. The minimum threshold for personal income taxes is being adjusted upward. And targets for social welfare benefits — education, health care, low-income housing, and pensions — have all been raised. If China’s planners have their way, the average Chinese baby born in 2015 will likely outlive his or her sibling born in 2010 by six years, gaining an extra year through better health care and other services. None of these targets seem out of reach, but it will require a sustained effort to steer more of the fruits of growth away from a politically privileged corporate sector and toward employees’ wages and the social services they need.

For all the lofty goals, key challenges to meeting them loom large. China’s financial system looks much stronger on paper than a decade ago, but it is still highly inefficient and total public debt is ballooning. Total outstanding loans are over 120 percent of GDP, and this doesn’t include bonds and other debt instruments. Throwing more renminbi at R&D and patents won’t on its own yield an innovative society without fundamental reforms of an educational system designed to create great test takers, not inventors. Meanwhile, China’s social services safety net has many gaping holes, especially for those in need. Despite reforms in health care, the costs of hospital visits and medications are still quite high for many. Even if China meets its energy and environmental targets, absolute levels of fossil-fuel use and carbon emissions will still rise substantially over current levels. And from an international perspective, faced with growing economic and trade deficits, China’s trading partners — especially in the West — are itching to challenge every protectionist-looking policy they can find. Although the West permitted a honeymoon period during the first years of China’s World Trade Organization membership, the number of dispute cases jumped dramatically during the past five years. If trends continue, China should invest in a lot more trade lawyers.

But China’s challenges are more growing pains than indications of what Minxin Pei once dubbed a trapped transition. One has reason to be optimistic that, in five years, China will be at least a somewhat healthier and happier country than it is today. Moderate prosperity might not sound all that impressive, but it’s a good leap forward.