Latest Five-Year Plan is Good News for US Businesses

By He Weiwen

The recent National People’s Congress session and Chinese Premier Li Keqiang’s report on government work have given a clear, comprehensive picture of the Chinese economy for the next five years. At the backdrop of a persistently weak and uncertain world economy and continuing downside pressure on the Chinese economy, the world’s second-largest economy will keep an annual growth rate target of 6.5 percent for the next five years. The target is only marginally lower than last year’s 6.9 percent goal.

Growth needed to reach 2020 goal

In 2012, China set a goal to double its 2010 real GDP and per capita income by 2020. From 2011 to 2015, GDP grew by an aggregate 46 percent. To reach the goal of double GDP, an average annual growth rate of 6.5 percent is necessary in each of the next five years.

With a 6.5 percent growth rate, China’s total GDP of RMB 67.7 trillion would reach RMB 92.7 trillion by 2020, or $14.15 trillion at the current exchange rate. That is approximately two thirds of the US GDP. China certainly needs more time to match the size of the US economy.

China has had a net population growth of 6 million annually during the past five years. If this trend continues, its total population is projected to hit 1.4 billion by 2020, creating a per capita GDP of about $10,000—defined as a good well being for the nation, but not a high-income status.

Biggest threat to growth: Unsustainability

The world has focused too much on the falling growth rates of China, instead of its healthiness and sustainability. The slowdown from double-digit growth rates to a level below 7 percent is not only inevitable, but also necessary.

The extraordinarily high growth rate of the past decade resulted in a series of structural issues, eroding economic fundamentals. An outstanding issue is the serious overcapacity in steel, coal mining, cement, plate glass, and electro-aluminum. China’s crude steel output surpassed 800 million tons in 2015, 5—50 percent of the world total—and has contributed to a worldwide steel glut and depressed market. The total capacity is 350 million more tons. Premier Li Keqiang’s report announced plans to slash 150 million tons of steel capacity, 500 million tons of coal mining capacity in three years, displacing 1.8 million employees.

The overcapacity has not only depressed manufacturing, but also contributed to pollution in many parts of the country. Many companies with heavy overcapacity and poor performance have become “zombie” enterprises, creating huge corporate debt and helping push Chinese debt ratio to a new high.

New engines for growth

The 13th Five-Year Plan does not create any large-scale fiscal stimulus. It only requires an active fiscal policy—fiscal deficit at 3 percent of GDP in 2016, for instance—and a prudent monetary policy. Top priority will be given to supply-side reform and structural changes. New engines for growth will be:

• Persistent growth of consumption. The consumption alone contributed 4.6 percent of China’s GDP growth in 2015, and is likely to gain further momentum in the next five years. The causes include expanding and upgrading of merchandise and housing consumption, due to the growing disposable income—about 7 to 8 percent each year—and an estimated 100 million new urban migrants. Also, service consumption will likely grow even faster, including education, healthcare, travel, entertainment and care for aged people.
• Robust growth of innovation, emerging and high-tech industries. They include aerospace, hybrid-engine automobiles, new generation of information and telecom technology, biotechnology and industry, alternative energy, environmental protection, high-speed rolling stocks, nuclear-power reactors and turbines, new materials, and maritime equipment. Those industries have growing at 8-10 percent annually over the past few years and will most likely accelerate in the next five years. For instance, China is already the world’s largest producer of electric cars. They will serve as a strong engine for the economic growth over the next five years.
• Traditional industries. Comprehensive upgrading of traditional industries, which still account for 88.2 percent of total industrial output value.
• Internet+. The fast advancing Internet+ and telecom technology is quickly changing the nation’s’ economy. Online retail spending is estimated to hit $1,132.8 billion in 2020, almost tripling the 2014 figure of $ 442.2 billion. The Internet penetration rate is estimated to reach 70% percent by 2020, from 50.3 percent in 2015.
• Service sector changes. A significant expansion and upgrading of the service sector will happen during the 13th Five-Year Plan. For example, as healthcare service opens to private and foreign operators, hospitals will quickly expand to offer better public service. With the second-child policy, maternity hospitals and child-care services could also see growth. With the expanding aging population, there will be an extensive build-up of elder-care centers across the country. As a result, the medical industry will grow simultaneously, with its total output value estimated at RMB 10 trillion by 2020, a 247 percent increase from 2015.

About the author: He Weiwen is the co-director of China-US/EU Study Center. This article was originally published in China-US Focus.