The Chinese Economy and the Future Implications of the “New” Five-Year Plan

The Chinese Economy and the Future Implications of the “New” Five-Year Plan

On March 5th, 2011 the National People’s congress approved its 12th five-year plan (FYP). Since, 1953 China has a set total of 11 FYP’s of which targets have either been met or missed. China’s economy has grown to become the world’s largest exporter after the U.S and its current GDP growth is at an annual rate of 10.3%. The new FYP advocates objectives that were set on previous FYP’s. Previous FYP objectives consisted of improving the quality of growth and infrastructure (New York Times, 2011). In the current FYP China is planning to invest in environmental protection and energy conservation as a way to tackle their unsustainable economic growth. China will increase environmental protection and energy conservation by increasing non-fossil fuel consumption. For the next five years they predict that non-fossil fuel consumption will account for 15% of China’s total fuel consumption. “China will invest $600billion on information technology, clean energy, environmental protection and scientific research and innovation” (Sarah, 2011). Environmental protection and energy consumption has become one of China’s major concerns due to their unsustainable economic growth. Environment Minister Zhou Shengxian suggests that China’s “pursuit of rapid growth led to severe pollution and excessive demand for resources”. These two factors will be one of China’s major obstacles in terms of achieving economic and social development”(Sarah, 2011).

However, China’s main priority within the plan still lies on improving peoples income, social infrastructure and “safety nets”. As means of fighting against the rising inequality in the nation. China is looking to aid these problems by increasing domestic consumption, which would increase total output. According to Mankiw’s theory (output=C+I+G+NX) suggests that China would have to decrease investment, NX or government expending if they wanted to increase domestic consumption. In reality, China would be better off decreasing net exports as it implies that their total output would be less reliant on trading with other countries. Consequently, with China’s re-occurring issues with WTO members such as, the U.S and Brazil, it would be convenient for the stability of the Chinese economy that they find other viable ways of increasing total output. The re-occurring issues have been partly due to small-scale issues, such as the import duties China imposed on the U.S Kraft Linerboard in 2006. China quickly fixed this issue by lifting up the import duties the following day. On a larger scale the WTO committee and members have accused China for out competing other countries with their low cost manufactured goods. Furthermore, complaining about their low-fixed-exchange rates that have allowed them to keep their tariffs low. Consequently increasing their demand for exports and imports. This is an issue China will have to confront sooner or later. However, the fact is, China has raised the world GDP and standards of living for many countries. (Economist, 2011)

Furthermore, we have seen that China’s rate of return on capital has increased by an accumulation of 90% since 2008. The OECD suggests that 25 % (2007) comes from assets and dividends. China is seeing high returns on capital because of the high demand in manufacturing and resource-extracting industries, of which are owned by state enterprises (SOE). More importantly if we take into account the capital return of privately owned domestic enterprises, the total growth of the private sector is immense. Hence, it has increased real wages and employment because of the abundance of capital in the private sector. However, The pre-tax rates of return for private companies are significantly more costly. The imbalance of capital is still large for different sectors. Thus, the Chinese economy has slowed down. However, this issue is currently being tackled by government subsidies on intermediate and final consumers for petroleum and electricity. Most importantly, subsidies have been made on distribution for private manufacturing enterprises and on December 11th the Chinese government began their annual Central Economic Work Conference (CEWC) were fiscal and monetary policies were discussed. (OECD, 2010)

Another issue that may hinder the FYP and their target of increasing social infrastructure, safety nets and improving peoples income is due to the immobility of Chinese household registration system and their demographic disparity in the work force. The Chinese household registration system links medical and educational benefits to the area where the person is registered, rather than living (OECD, 2010). However, pensions are not regulated this way, and because of this regulation people that migrate from one place to another may be excluded from the rights to their pensions benefits. The effects of this regulation are far worse for people that migrate from rural to urban areas. A study conducted by China’s Health and Retirement Longitudinal Study (CHARLS) suggested that, “most of the people who migrate generally do not have labour contracts, are not affiliated to the social security system and are not paid the hourly minimum wage” (Angel, 2011). However, the incentive to move is higher than expected because people who live under poverty lines are willing to take the risk to move into urban areas, in search of better standard of living for their family and themselves. (World Bank, 2011)

Moreover, increasing demand for manufacturing and extraction industries in China have reallocated labour, hence people that live in rural areas are obligated to move into urban areas. By 2008 less than 40% of the labour force was still employed in agricultural practices such as farming. Evidently, the average productivity of goods in the agricultural sector has decreased (OECD, 2010). Nonetheless, the OECD suggests that the movement of people into urban areas is essential to the expansion of urban territory and development of growth and social infrastructure. Accordingly, China is approaching this issue by educating a larger percentage of the youth, implementing complete subsidies on school fees by 2008. Figure 6. Provided by OECD suggests that 90% of children that ended primary school in 1999 graduated with nine years of schooling (OECD, 2011). By 2008, student applications for university increased by 60%.

Subsequently, even though domestic consumption has not been able to keep up with the growing GDP. Urbanization is forcibly expanding and more people are migrating into cities. Therefore, suggesting that standards of living have been improving over a period of time. China’s aggregate private consumption has been increasing since 2008. OECD suggests that consumption per household was at 9.6% (annual rate). The aggregate private consumption is measured by the amount of equipment and electrical appliances a household owns (OECD, 2011).

“Nearly all urban homes have washing machines and at least one air conditioning unit, color TV and mobile phone…Indeed, the average household income level of this group (measured at purchasing power parities) now exceeds that of 30% of U.S households” (OECD, 2011).

Economies throughout the world have shown that living standards in rural areas are commonly lower than living standards in urban areas partly because of the price level difference for goods and services. The international Comparison program (ICP) estimated poverty lines in China for the first time on 2005. Their statistics measured 11 urban cities and showed that food prices in urban areas were 42% higher than food prices in rural areas. (World Bank, 2008) Nonetheless, China’s poverty has decreased by “two-thirds in the four years to 2007, to 4% of the population” (China’s national bureau of statistics). These statistics for poverty are based on daily consumption per person. The World Bank provided similar poverty measurements in 2009, however their measurements were based on their daily income per person. Therefore, this supports the theory that China’s standards of living are actually increasing as even China’s poorest rural peasant are saving a fraction of their income. (OECD, 2010)

China’s rising percentage of people being educated and expanding urbanization has increased standard of living. Hence, it explains why China’s five-year plans continuously advocate for an improved quality of growth and infrastructure rather than advocating for an increasing “unsustainable” growth and infrastructure. China realized that its growth was becoming unsustainable after their current account surplus in 2006. In this period, disruptions in certain food supplies increased inflation in their economy. (OECD, 2010) China’s Demand curve was heavily unstable; their imports of goods and services were greater than their total exports. Additionally, household and government behavior changed drastically as GDP grew rapidly from the trading imbalance. Accordingly, fear made saving rates increase faster than investment rates. As a response the Peoples bank of China (which is the Central Bank in China) shifted their reserve ratio, causing an inflation rise. (Manchiw’s theory argues that inflation=% change in money demand + the % change in the velocity of money- %change in output). Furthermore, as China’s reserve ratio shifted and global trading soared (consequence of U.S credit crunch), China’s output and net exports soared. However, China rapidly recovered from this crisis and in 2009 China’s GDP was gaining momentum again (OECD, 2010)

China’s economic and political timeline has proved that they are in a constant state of “reform”. China has gained a huge responsibility for the global and domestic economy. In one hand, China has to maintain their current standing as the largest exporter and 2nd largest importer in the world. On the other hand, China has to maintain their own domestic economy and improve the infrastructure/quality of life of their growing population. Therefore, China’s planning strategy and constant state of reform is adequate for the moral and economic well being of the nation.
Moreover, the Chinese government has to make the hard decision of prioritizing goals based on their domestic and global responsibility. Currently, the Euro zone crisis has been worrying China, as they fear that it may affect their net exports. China currently holds more than 30% of manufacturing imports for European countries. Hence, a decreasing demand for exports would mean that China’s GDP would decrease. However, New York Times suggests that China is prepared to fight against the impact of the Euro crisis by holding more than 3 trillion USD in European Assets. China also expects that the ECB and other European countries will aid and find a solution to the Euro crisis in the long run.

As previously mentioned, on December 11th, 2011 China held their annual central economic work conference (CEWC) were government officials, provincial chiefs, military representatives, bank leaders and CEO’s of state owned enterprises have gathered to discuss economic goals for 2012. Throughout the conference China has “again” come to the consensus that unsustainable growth is worrisome. Nevertheless, current data provided by the World Bank suggests that inflation is decreasing and dollar inflows are slowing down. This allowed China decrease the extra money reserves that domestic banks were holding. Accordingly, China said they were looking forward to many fiscal and monetary policy changes. Firstly, China wants to make reforms on their current policies for benefit and safety nets. Changing the household registration system policy will ensure a decrease in the inequality of benefits between rural and urban residents. Secondly, China is looking to decrease growth to 8% and subsequently increase government spending on tax cuts. As means to (provide incentive for growth in small private enterprises and service industries) and improve the quality of social infrastructure. Interestingly enough, the CEWC excludes the ministers of finance and commerce, which gives us more reasons to speculate that corruption, and secrecy amongst government officials is still present. According to the Corruption perception index (CPI), China is ranked at 75 with a score of 3.6 out of 10 (0 illustrating high corruption and 10 meaning corruption free). (Economist, 2011)

References:
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