The missing pieces in China’s rebalancing puzzle

China’s leaders are taking aim at the missing piece of China’s most daunting structural problem — changing the behavioral norms of fearful and uncertain Chinese families. This is a step in the right direction as China comes face to face with the transitional imperatives of an urgent shift from the producer model of the past to the consumer model of the future.

For China, the so-called Fifth Plenum of the Central Committee of the 18th Party Congress, held from Oct 26 to 29, came at a critical juncture. Facing serious challenges at home and abroad, the nation’s leadership endorsed a draft of the long-awaited 13th Five-Year Plan — a strategic road map that will frame China’s economic and social priorities over the 2016-20 period.

While the detailed provisions of the new plan will not be available until formal presentation to the National People’s Congress next March, three indications of the broad thrust of the upcoming plan are evident:

First, the communique refers elliptically to China’s objectives to stay the course of “medium-high economic growth”. It took follow-up speeches by Premier Li Keqiang and then by President Xi Jinping to translate that into a gross domestic product (GDP) growth target of around 6.5 per cent over the next five years — basically the growth answer that could meet China’s longstanding promise to double per capita incomes over the 2010 to 2020 time frame. Unsurprisingly, this represents a modest slowdown from the original 7 per cent target of the previous Five-Year Plan. However, with actual growth over the past five years likely to average about 7.8 per cent — somewhat faster than planned — the downshift to 6.5 per cent may feel a bit more abrupt.

This slowdown has been long telegraphed. For a variety of well-documented reasons — macro imbalances, excess resource consumption, environmental degradation and pollution, and mounting income inequalities —the world’s second-largest economy is simply incapable of staying the course of its former 10 per cent hyper-growth trajectory that was realised from 1980 to 2010. The design of the 13th Five-Year Plan reflects the familiar refrain of China’s inevitable transition to a more sustainable growth trajectory — as the Chinese would say, a shifting emphasis on “quality over quantity” in framing the growth experience.

Second, the new plan reaffirms the structural rebalancing towards services and consumption that was initiated in the 12th Five-Year Plan. The upcoming plan underscores the critical point that the mix of the economy matters more than an overall GDP target — a point that continues to fall on deaf ears in the West where the fixation on China’s headline GDP growth remains unwavering.

As before, the stress on services- and consumer-led rebalancing does not mean that China is ignoring its traditional sources of growth. The Fifth Plenum makes repeated references to a more sophisticated and innovative manufacturing sector. It stressed the Made In China 2025 campaign, driven by entrepreneurship and new business formation. It also emphasised state-directed focus on strategic emerging industries from biotech and electric cars to alternative energy and new materials, as well as Internet-Plus, driven by cloud- and Big-Data-based increases in e-commerce. This is very much in keeping with the Chinese leadership’s long-emphasised innovations-based strategy that it correctly believes is essential to avoid the dreaded “middle-income trap” — a condition in which fast-growing developing economies are typically stymied when they hit income levels close to that currently attained by China.

SOCIAL SAFETY NET AND QUALITY GROWTH

But there is a third area of focus in the new 13th Five-Year Plan that breaks from the recent past — a willingness to up the ante on the social safety net as a catalytic force in turbo-charging consumer-led rebalancing. While the 12th Five-Year Plan was effective in laying the groundwork for this transformation — mainly by boosting the personal income share and fostering an increasingly services-based industrial structure of the Chinese economy — it was not effective in moving the needle on private consumption. Services are now more than 51 per cent of Chinese GDP — up markedly from the 44 per cent share at the onset of the 12th Five-Year Plan in 2011 — but private consumption has only inched up to 37 per cent of GDP from 35 per cent over the same time period.

The disconnect between solid growth in services and labour income generation, juxtaposed against minimal growth in discretionary consumption, stems largely from understandable fears of an insecure future that continue to grip Chinese families. As a result, newfound income continues to be skewed more towards saving rather than spending; the saving rate of urban households exceeded 30 per cent last year — up significantly from the 24 per cent rate a decade earlier.

The just-concluded Fifth Plenum addresses this key constraint directly. Endorsing universal enrolment in retirement and critical illness healthcare plans by consolidating existing plans that are currently bifurcated into urban and rural schemes are new steps in that direction. The same is true of the related willingness to deploy state capital to fund such initiatives — in this case, underscoring earlier announcements to raise taxes on state-owned enterprises, from 15 per cent to 30 per cent by 2020, to support expansion of China’s National Social Security Fund.

Equally important is a new emphasis on targeting increases in hukou-based urbanisation (household registration for urban population) — in essence, providing portability to the social welfare benefits of China’s roughly 270 million migrant workers. Currently, while around half of the Chinese population lives and works in urban areas, only about a third of the people actually receive social benefits in their places of residency. The only way to close that gap and address the insecurity of migrant workers is by pushing ahead on hukou reform — allowing migrant workers to transfer their residency permits from their place of birth to their place of employment.

A shift in China’s family planning policy is the icing on the cake. The “one-child policy” — officially implemented in 1980 to contain a population explosion that China could not afford at the time — has long been recognised as unsustainable. The hope now is that a prompt shift from one to two children per family can address both an unbalanced population, including too many males, and an increasingly serious ageing problem — namely, the prospects of soaring dependency of an older generation on workers that is likely between 2010 and 2040.

Indeed, there is good reason to believe that China may have already spent the demographic dividend of the surge in its working age population that averaged 14 per cent annually from 1965 to 1985. However, even if a doubling of child rearing were to occur immediately, that would do little to offset the decline of the working-age population that United Nations demographers place at -1 per cent annually between now and 2020. The soonest any demographic relief might be expected for shrinkage in China’s working age population would be 2030. Still, the shift from a one- to a two-child Chinese family planning policy is a step in the right direction.

All in all, the Fifth Plenum, in conjunction with the 13th Five-Year Plan that it foreshadows, focuses on the most important missing pieces in China’s strategic rebalancing puzzle — the insecurity that has prevented Chinese families from playing a more active role in what the leadership has long called a moderately prosperous society. Without converting that fear into confidence, there can be no consumer-led China. As China’s challenges intensify, speedy and effective implementation of the 13th Five-Year Plan becomes more vital. YALE GLOBAL

ABOUT THE AUTHOR:

Stephen Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, is the author of Unbalanced: The Codependency of America and China.