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4 Takeaways from China’s Economic Blueprint

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China Power

4 Takeaways from China’s Economic Blueprint

What’s different — and what’s not — about China’s economic planning for the next five years.

The annual meeting of China’s National People’s Congress kicked off in Beijing this weekend, highlighted by Premier Li Keqiang’s government work report on Saturday. The NPC always finalizes China’s targets, goals, and areas of emphasis for the coming year. This year’s session, however, will see the final adoption of China’s next Five Year Plan, which will cover the period from 2016-2020, giving even more heft to the proceedings. Below, I run through four major takeaways from China’s economic blueprint for 2016 and beyond, as outlined in Li’s work report – and what these points mean for China.

1. China can’t afford for its growth to slow down any more. Li repeated the previous assertion that, to achieve its goal of doubling China’s 2010 GDP and per capita income levels by 2020, “the economy needs to grow at an average annual rate of at least 6.5 percent” for the period covered by the 13th Five Year Plan (2016-2020). What that means, in practice, is that China’s economic growth cannot continue to slow. Growth has declined steadily over the past three years, dropping from 7.7 percent in 2013 to 7.4 percent in 2014 and then to 6.9 percent in 2015. This year’s growth target has been set at 6.5 to 7 percent – which means 6.5 percent growth is China’s floor, not only for 2016, but for the entire period of 2016-2020.

Li’s blueprint for achieving that growth — even as China moves to stem overcapacity in its heavy industry sectors — is to focus on “advanced manufacturing, modern services, and strategic emerging industries” (particularly the high-tech sector). But can China make that transition quickly enough to keep growth above the red line of 6.5 percent? If not, given the repeated emphasis on that magic number, Beijing may be tempted to delay its transition in order to meet the 2020 target, which has taken on a massive political significance as part of China’s “twin centenary goals.” When considering whether to intervene to prop up China’s economy, Li said, the government would keep in mind not only “current realities” but also “our long-term development goals.”

2. Innovation is the key to China’s growth plan… Li was up-front about this point: China’s economic transition will live or die based on the country’s ability to innovate. “Innovation is the primary driving force for development and must occupy a central place in China’s development strategy,” Li said. In fact, China’s current blueprint calls for “scientific and technological advances” to contribute 60 percent of the country’s economic growth by 2020.

To help achieve that goal, Li outlined a number of policies, from tax incentives for high-tech firms and research and development, to encouraging alternative methods s for funding start-up (including crowdsourcing, angel investors, and venture capital). Li also said that China’s investment into research and development should reach 2.5 percent of GDP by 2020, up from around 2 percent in 2013.

3. …But the era of big investment isn’t over. Continuing a focus laid out by the 12th National Party Congress’ first meeting in 2012, Li emphasized the need for consumerism and the service industry to drive economic growth going forward. But that doesn’t mean China is turning its back on big-budget government investment projects as a means of boosting the economy. This year alone, Li said, in accordance with the new FYP, China will invest 800 billion renminbi (RMB) ($122.7 billion) in railways and 1.65 trillion RMB ($253.2 billion) in roads. And that’s not including unnamed expenditures on a laundry list of “major projects” Li mentioned “to develop hydropower, nuclear power, ultrahigh-voltage power transmission, smart grids, pipelines for oil and gas transmission, and urban rail transit.”

In fact, China’s 2016 budget will see its deficit rise to reach 3 percent of GDP – up from 2.3 percent in 2015. Li defended the increase as “necessary, feasible, and also safe,” pointing out that “China’s deficit-to-GDP ratio and government debt ratio are lower than those of other major economies.”

4. The environment is a priority for China’s government – but not its top priority. A renewed focus on the environment should come as no surprise, after China’s recent commitments to reducing emissions and increasing clean energy usage on the international stage. By putting environmental commitments into Li’s official work report, China’s leaders have given the highest possible stamp of authority to China’s great clean-up. In particular, Li spoke of the lofty goal to ensure that China’s major cities have “good or excellent” air quality “for 80% of the year.”

Yet while China is saying all the right things about its environment – promising to cut emissions from coal use, increase the use of renewable energy, and punish polluters – the environment is not given as much emphasis as other areas of focus. Li’s section on environmental goals for 2016 is sixth out of eight broad topics for action, behind all of the economically-themed promises and plans. With Li declaring that China “must be fully prepared to fight a difficult battle” on the economic front this year – and with the international climate change summit in Paris in the rear-view mirror — the worry is that the environment will once again take a backseat to China’s economic growth.