The 12th Five Year Plan of China, approved by the National People?s Congress (NPC) a few weeks ago, is being intensely discussed by economists. The discussion is not only over whether China, which has been growing at an annual average rate of 10%-plus for almost a whole decade (except the brief financial crisis-induced slowdown in between), will be able to moderate growth to 7%. It is also over what such growth moderation means for the prospects of the region. And whether China?s decision to lower growth and focus on distribution vindicates what many have been arguing: high growth and effective distribution cannot go hand-in-hand.
Speculation over whether moderation of growth is indeed possible stems from scepticism over whether wings of the growth engine can be clipped when it takes off. Short-term history does
not support this objective. During the 11th Plan, the actual GDP growth unfailingly exceeded the target GDP growth. During 2005-10, the target GDP growth for each year was 8%. However, the actual growth each year, including the more sober years of 2008 and 2009, was well above 8%. While these two years produced 9.6% and 9.2% GDP growth, the other years saw growth
exceeding 10%.
Going by the last Plan, clipping the wings of the economy won?t be easy. Concerns over ?over-heating? of the economy had not become as rampant when China embarked on its last Plan. These worries have peaked in the last few years, coupled with apprehensions over a ?hard-landing? of the economy. Chinese authorities appear to be approaching their mission far more seriously this time. But, in this regard, there is a difference between perceptions of the central government and the provinces. Before the NPC, provinces and municipalities held their own individual congresses for discussing GDP targets. Most provinces preferred to target GDP growth of 10% or more. This is expected, given that performance incentives for provincial governments and administrations are tuned in to GDP targets. This can well turn out to be a major problem for the central government in moderating growth. With incentives in the system aligned to high growth, introducing a reverse trend might be more difficult than what the central government expects.
China?s policy in moderating growth seems to be to reign in expansionary policies that have been fuelling growth in recent time, and also exacerbating other pressures like inflation. Much of the expansion has come from the stimulus injected during the financial crisis. China has become an exceedingly cash-rich economy, not only because of expansion in liquidity but also due to a lack of adequate variety of financial instruments for parking liquid cash. Real estate is the main asset promising returns in the long term. This has led to a stiffening of housing and property demand on part of not only the salaried class but also other segments of the economy who are cash-rich. Property prices have shot sky-high; developers have seized the opportunity to quote even higher prices, leading to further escalation. Contraction of liquidity might help in containing this process by a large extent. With less cash driving economic activity and transaction values, nominal GDP growth can be brought down; with prices falling, there could be a similar impact on real GDP growth as well.
Will reduction in Chinese growth imply similar prospects for the region? Unlikely, because China intends to shift to an economic model that derives inspiration from domestic consumption and investment. The earlier Plan?s thrust on exports has been replaced by emphasis on domestic growth. While this does not mean that cheap ?made in China? products will vanish from the nooks and crannies of the world; China is expected to become a market absorbing more exports from other countries. This is good news for several countries in the region such as India, Malaysia, the Philippines, Vietnam and Bangladesh, whose manufacturers can now delve deeper into the Chinese market and production networks.
Despite trying to control market failures as much as possible, it is clear that after more than three decades of economic reforms, China realises that growth and distribution do not always go hand in hand. Regional income
inequalities and other disparities are clear indications that GDP growth does not benefit all equally. The result of uneven benefits is social discontent. The Chinese system can hardly afford to proceed with discontent. What
China, therefore, will try to do, and probably wisely, is to ensure that
people do not feel left out of the
growth process. For that, cooling
down is important. The next five years will be keenly watched by other emerging markets, to see if the Chinese experiment succeeds.
The author is a visiting senior research fellow at the Institute of South Asian Studies in the National University of Singapore. These are his personal views
