China’s eleventh five-year plan, completed in October and setting the economic policy course for the period 2006-2010, has been hailed by some as a sign that China is finally giving up on wasteful, investment-driven, resource-intensive growth. Instead, we will see a new emphasis on efficiency, and more reliance on consumption to drive growth. Don’t believe it.
The communiqué gave only two numeric targets: per capita gross domestic product in 2010 must be double the 2000 figure, and “each work unit must cut its use of energy by 20 per cent of current levels” by 2010.
The desire to improve energy efficiency is real and there will likely be a drive to get companies and government entities to cut back on wasteful energy use. There will also be a few efforts to curb consumer energy use, for instance by placing significant taxes on big, gas-guzzling cars. Yet the planners are likely to avoid the most obvious and effective way of promoting energy conservation: raising the prices of electricity and gasoline. At present these prices are tightly controlled by Beijing, at well below their true economic level. Real energy-efficient growth in China will begin only when the mandarins muster the courage to slay the sacred cow of regulated low energy prices.
More broadly, there is no evidence that the overall economic growth target is being ratcheted down in the short term. Under the long-term economic master plan unveiled in 2001, China aims to quadruple its GDP between 2000 and 2020, implying average annual growth during the period of 7.2 per cent. That target remains untouched.
Over the next five years, according to the National Bureau of Statistics (NBS), China’s economy will grow by an average of 8.5 per cent a year, down only slightly from the 8.9 per cent average growth of the past five years. Given the heavily-politicised nature of the GDP figure, this NBS statement should not be read as a neutral forecast, but rather as a statement of the government’s true target growth rate.
Official forecast real GDP growth, 2001-2020: (Average annual %)
*Actual, assuming 9.5 per cent growth in 2005. Source: NBS
More importantly, economic facts suggest that the next five years are likely to see continued strong investment- and export-driven growth.
First, China is in a demographic “bulge” period. The biggest age cohort in China today is the 125m-strong 15-19 year old group – i.e. the group preparing to enter the labour force. The younger age cohorts (the 10-14 year olds and 5-9 year olds) are a lot smaller. Therefore, the opportunity to maximise growth based on labour-intensive production is right now. Planners are unlikely to let this never-to-be-repeated opportunity slip.
Second, China is enjoying massive efficiency gains from the shift of production from the state to the private sector. Since 1998, the state sector’s share of business output has fallen by 13 percentage points to 33 per cent, while the private sector’s share rose by 10 points, to 45 per cent (foreign enterprises account for the rest). The shift of production from state to private produces a one-off efficiency gain that boosts growth. This shift is likely to continue at a rapid pace for the next four or five years and then decelerate.
Finally, there is a strong pragmatic reason for keeping to a fast-growth course. Beijing faces a number of large problems that are most easily solved by rapid growth. Most salient is the mountain of bad loans weighing down the financial sector. So long as the economy grows faster than the banks’ ability to extend dubious credit, the difficulty is manageable. Ultimately, more efficient capital allocation will have to take over from growth as the solution to financial-sector woes. But this is at least several years away.
Despite these strong underlying growth drivers, China will likely hit a cyclical downturn in 2006-07. This is because the investment boom of the past three years has created excess capacity in many industries. This is starting to hit corporate profits. Profits will fall further in the next two years, redundant producers will exit the market, and economic growth will slow.
But will the government cheer the slowdown as a sign of more efficient growth? Not on your life. The minute economic growth looks likely to dip below 8 per cent, the government will be sure to pump things up again with a round of fiscal stimulus, spending heavily on infrastructure just as it did in the last downturn in 1998-2000. “Green growth” is at least another decade away for China.
The China Economic Quarterly is an independent newsletter devoted to analysis of the Chinese economy and business environment since 1997. It draws on the 25 years of combined experience of its editors, veteran financial journalists Joe Studwell and Arthur Kroeber, and also publishes articles by leading China-focused economists and journalists. This column appears exclusively on FT.com on alternate Mondays.
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