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China’s 2016 National Party Congress: An Opportunity Missed

May 6th, 2016

By Davis Florick – Junior Fellow

Each year, China’s National Peoples’ Congress (NPC) provides a visible platform for Chinese Communist Party (CCP) officials to set policy direction for the coming year. At times, NPC’s have been opportunities for Party leaders to introduce new far-reaching reforms and announce guiding pronouncements on the direction they have chosen. Recently, there was much speculation that, given the precarious nature of China’s future economic outlook, the 2016 NPC would be notable. Many experts speculated whether President Xi Jinping’s efforts to eliminate Party corruption and improve economic transparency would culminate in the introduction of reforms. Unfortunately, it appears as though such notions and expectations were misplaced. Although the long term impact of the 2016 NPC has yet to be determined, the immediate outcome appears circumspect. Rather than pursuing a more aggressive and bold approach, the Xi Administration seems to have opted for a conservative strategy. In the absence of more significant reforms, many observers are concerned that necessary measures to address Beijing’s economic challenges are being delayed.

When examining China’s current and potential economic standing, Beijing looks to be facing three major domestic issues.  The changing labor force compilation – particularly increasing wages in the coastal regions – is placing greater costs on manufacturers, thereby weakening economic growth. Issues such as the rising age bubble, underperforming state-owned enterprises (SOE), and expectations within the People’s Liberation Army (PLA) of a steadily rising defense budget are all contributing to significant federal budgetary challenges. Specifically, the Chinese debt-to-gross domestic product (GDP) ratio is approximately 250%, which experts believe will lead to significant shortcomings in long-term physical capital investment. Chinese culture tends to espouse high savings rates, with a focus on owning land and housing as a means to store wealth – a trend which has been reinforced in recent years by questionable banking practices. Investor caution and a reluctance to spend more – hampering a shift toward a more consumer-based economy – has also complicated China’s economic outlook. Taken collectively, the changing labor force, demands on the central government budget, and cultural propensities regarding managing money all present significant obstacles the CCP faces as it attempts to maintain relatively strong economic growth.

Considering the challenges the Xi Administration is encountering, the 2016 NPC outcome is intriguing. The 13th five-year plan, rolled out at the 2016 NPC, is the centerpiece of China’s economic reform. The strategy includes four primary objectives:

  1. Secure a middle-high economic growth target;
  2. Shift the emphasis from investment and exports to domestic consumption;
  3. Enhance individual well-being through social welfare and health care reforms; and
  4. Introduce structural reform.

These aforementioned focal points are intended to help Beijing address the economic obstacles previously mentioned. In the abstract, the four items outlined in the 13th plan can begin to resolve many of China’s challenges. However, breathing life into policy pronouncements requires a more vigorous and prolonged effort. Experts’ concerns lie specifically with how the CCP plans to act upon the precepts it has identified in the 13th five-year plan, with particular attention to the first and fourth points.

The first item to worry domestic and international observers is how Beijing intends to maintain a middle-high economic growth target. Chinese Premier Li Keqiang announced the target GDP growth rate for 2016 would remain at 6.5-7%, with the same range being set for the remainder of the 13th five-year economic plan, stretching from 2016 to 2020. Likewise, Beijing will utilize its $3.2 trillion in foreign reserves to maintain its exchange rate. At the same time, the money growth rate is projected to increase from 12 percent in 2015 to 13 percent in 2016. This will necessitate that the central government invest $2.75 trillion in the economy to increase the money growth rate. Yet, all the aforementioned efforts are designed to improve the strength of the yuan by both fixing exchange rates and preserving an independent monetary policy. This program would lead one to recall the trilemma of international economics in which a government can control two of the following three tools: the exchange rate, an independent monetary policy, and free capital flows. Given the preceding three items, Chinese officials have already indicated a willingness to curtail the outflow of capital, which could cause significant concerns among domestic investors. Ultimately, this policy of the growth target rate will be difficult to achieve without substantial government intervention in the form of investment.

Similarly, Chinese officials have promoted the goal of achieving structural shifts in the economy, with only limited acknowledgement of potential obstacles. In a number of areas, Beijing has indicated it intends on transitioning its economic model (from export to domestic consumption-focused), and even in some ways manipulating its societal structure, while continuing to prosper. For instance, in the NPC’s concluding press conference, Premier Li indicated the government is taking strong steps to reintegrate and ease the transition of workers who lost their jobs – many in ongoing SOE reforms. The Premier also stressed the desire to begin the more complicated shift from an investment and export-driven economy to focus more on domestic consumption. On this point many experts, both domestic and foreign, have raised concerns about the CCP’s divergent interests. At present, the targeted growth rates elaborated on previously and how officials intend to achieve them suggest the likelihood of additional government investment projects. This would likely increase the already exorbitant debt-to-GDP ratio and continue to crowd private investors out of the lending market. As a result, physical capital investments needed to secure long term growth could stagnate. To help minimize some of the potential limitations to consumption, Chinese officials are exploring a Tobin tax, which would limit currency trading. From the 2016 NPC, it appears Beijing is long on goals yet short on decisions.

The fear for a number of analysts and those with a stake in China’s economic success is centered on “over-the-horizon” problems and the government response to date. For years, the CCP has been praised for post-1978 economic growth. Starting with Deng Xiaoping, Party officials have taken bold steps first to energize the economy and later to maintain high growth rates. However, prior to Xi Jinping’s tenure, concerns had been mounting, albeit slowly, that Beijing was becoming increasingly governed by consensus. Group decision making dynamics suggested that bold reform – the kind needed to shift the economy’s orientation and restructure a variety of social programs – was beyond the grasp of a government run by committee. President Xi, for better or worse, has come to represent a changing attitude. His decisive leadership style has appeared conducive to introducing reform. Furthermore, the 13th five-year plan has added symbolic significance because the Soviet Union did not last to see a 14th. Under those conditions, this NPC could have been an opportunity to usher in change. It appears such transformative efforts did not occur. In all fairness, it may prove that this was not the right time or that the path charted by President Xi is correct. Nevertheless, a number of onlookers, the 2016 NPC represents a missed opportunity.

Yet, while questions have been raised in the wake of this year’s meeting, what might a more reform-focused outcome have looked like? Chinese officials could have perhaps distanced themselves from target growth rates. The concept largely originated with the Soviet Union nearly a century ago. Committing to a specific percentile adds unnecessary pressure for government interests – particularly in a country where the state both shapes policy and manages firms – to achieve short term success at the cost of long term pragmatism. In line with an end to targeted growth rates, curbing government deficit spending is necessary for long term sustainability. Despite the stated goal of a 3% deficit in 2016, due to limited economic growth, achieving a 6.5% expansion will require even more government spending. However, should Beijing slowly decrease its deficit spending year-on-year, it could support a more gradual economic landing. On the social side of things, Chinese officials could have attempted to overhaul the welfare system for senior citizens. By 2025, approximately 25% of the population will be over 60. However, government support is extremely limited; rather, the state still relies on the traditional concept of familial support. Establishing a more robust pension system now would introduce an extended period to work on difficulties before the heart of the age bubble reaches retirement. Although reform will be a painful process, China is likely to need more of it to avoid an even more painful fall.

The 2016 NPC was expected to be a more active meeting than the annual standard. With the introduction of the 13th five-year plan, the economy, and the potential for reforms, was expected to be the focus. Expectations had been rising that President Xi would exercise his leadership to promote structural change. However, at every turn official statements appeared lacking the substantive modernizations that observers believed were needed. Although the government has much detail to determine, at the onset it would appear the 13th five-year plan and 2016 NPC were an opportunity missed. As China’s economy continues to slow, the focus will now be on whether senior leaders will make significant reforms a priority.

 

About Davis Florick

Davis Florick is a Senior Fellow in the HSC Security and Defence division, a Special Assistant to the United States Deputy Under Secretary of Defense for Policy, and a James A. Kelly non-resident fellow with the Pacific Forum. He has completed his Executive MBA at the University of Virginia Darden School of Business, holds a master’s in East-West Studies at Creighton University, and will be starting his PhD in International Relations at George Mason University in Fall, 2018. His foreign relations areas of concentration include East Asia and the former Warsaw Pact and Soviet Union. Davis has been published in International Affairs Forum, the World Business Institute, and the International Affairs Review, the Diplomat and RealClearDefense. He was also a member of the 2015 Nuclear Scholars Initiative with the Center for Strategic and International Studies.