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Big problems in China

Brian Milner highlights four major issues China watchers are keeping a close eye on in what could be the most transformative blueprint since the pragmatic market reforms of Deng Xiaoping in the 1980s

Miners smoke during a break at a coal mine in Changzhi, Shanxi province November 25, 2009. China, the world's top emitter of greenhouse gases, is aiming for many more years of rapid growth fuelled by coal as its main energy source. Picture taken November 25, 2009.

Miners smoke during a break at a coal mine in Changzhi, Shanxi province November 25, 2009. China, the world’s top emitter of greenhouse gases, is aiming for many more years of rapid growth fuelled by coal as its main energy source. Picture taken November 25, 2009.

REUTERS

When China's National People's Congress gathers for its annual session in Beijing on Saturday, the 2,943 delegates will be dealing with one of the last vestiges of Soviet-style economic management – the five-year plan. Long gone are the hard targets and unyielding production quotas for every agricultural commune, factory and mine that Mao Zedong imposed in an effort to catch up quickly to industrial powers, with disastrous results. The modern Chinese version is a more flexible guide setting out the government's broad goals not only for the economy but also social policy and, now, environmental safeguards. One thing hasn't changed though. What party leaders want, the Congress will rubber-stamp, as it has done with every previous plan since 1953.


Economic growth

China's leaders are attempting to engineer a difficult transition away from an investment-driven economy dependent on heavy industry, cheap exports and infrastructure spending to a more sustainable model fuelled by domestic consumption, higher-value manufacturing and a considerably expanded service sector. This is bound to be a lengthy process with plenty of hiccups along the way. But the plan should provide a road map highlighting sectors targeted for greater investment and those where capital is being restricted, such as the infamously overproducing steel industry.

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China's economic expansion slowed last year to an official rate of 6.9 per cent, falling below the 7-per-cent target for the first time since the global recession in 2009 and the weakest annual growth in more than 20 years. Many analysts are skeptical about even this number, suspecting it's actually far lower than advertised.

The GDP target for 2016 is expected to be pegged at 6.5 per cent to 7 per cent, with the five-year plan calling for about 6.5-per-cent average annual expansion, which would still be impressive for the world's second-largest economy. Anything lower than that would make it impossible to reach the government's publicized target of doubling both gross domestic product and per capita national income – to $12,000 (U.S.) a year – between 2010 and 2020.

Would Beijing fudge its numbers in the interest of keeping its plan on track? The short answer is yes, veteran analysts say, because it's happened before, when provincial officials have goosed figures to keep their political masters happy.

"The economy will almost certainly not grow at anything close to these rates this year or over the medium term," Capital Economics says in a report. "Few now believe China's economy is growing at the rates shown by the official figures. We are more upbeat than most, but still see growth rebounding only to 5.5 per cent from 4.3 per cent last year."

A survey of China economy watchers last month, which was conducted anonymously, pegged growth last year and again this year at no better than 4.3 per cent.

The upshot is that the country appears to be facing a harder economic landing than many boosters and technocrats had hoped or predicted, which makes its vital transformation over the next five years all the more difficult.


Industrial restructuring

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Fixing bloated, debt-ridden, inefficient and often corrupt enterprises under state control has become a centrepiece of the new plan. This sector accounts for about 40 per cent of industrial output, an outsized portion of overcapacity, close to half of all bank lending, a big chunk of the known corruption problems and virtually all the so-called "zombie" companies. These are the walking dead that have effectively halted most production but maintain employment at low pay levels and meet their debt obligations through further borrowing – all to avoid adding to the growing toll of bankruptcies and loan losses.

Indications, according to Reuters, are that Beijing is determined to shutter some of the zombies, merge others and cut up to six million of the state jobs (out of a total of about 37 million) – nearly one-third of them in steel and coal production – in the next two to three years to slash overcapacity and reduce industrial pollution. Analysts will be looking for signs in the new plan that state-owned companies will be required to behave more like their profitable privately run counterparts.

In any case, China's massive overproduction of everything from steel, chemicals and cement to paper, aluminum, glass making, mining equipment and shipbuilding must be addressed. The glut is depressing prices, adding more pain to the flagging domestic economy and heightening friction with the United States and other leading trade partners as desperate producers export surpluses at levels well below costs.

In steel alone, the Chinese surplus exceeds total existing output by the United States, Germany and Japan combined. Beijing is determined to slash up to 150 million tonnes of annual capacity by the time the latest five-year plan ends in 2020.


Environmental protection

It's been nearly two years since Premier Li Keqiang told the 2014 Congress that it was time to wage war on pollution. Now, as delegates gather in Beijing for this year's annual session, the city is under another smog alert, and improving the environment has become a crucial goal of the new five-year plan, the greenest the government has ever produced. That's partly thanks to its pledge in the Paris climate-change accord to cap emissions in about 15 years, but also because of the rising economic costs of dealing with severe pollution.

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Coal consumption decreased in 2015 for the second year in a row, mainly because of the economic slowdown and the continuing shift away from heavy industry toward much environmentally friendlier services. Beijing intends to slash excess output of the fuel and move laid-off workers to other sectors, enforcing a three-year ban on new coal mines.

At the same time, it is expected to leave overproduction by the solar-panel industry alone, in the belief it can grab a larger share of the global boom in renewable energy.


Social safety net

The new five-year plan is expected to correct this flaw as part of strengthening the feeble safety net. This is partly in the hope that a more secure consumer will be inclined to save less and spend more. It's also regarded as a key means of tamping down social unrest that could spread in a hurry over widespread cutbacks, particularly in China's northeast rust belt of coal mines and steel mills.

Veteran China watcher Stephen Roach, former chairman of Morgan Stanley Asia, calls the government commitment in the new plan "a willingness to up the ante on the social safety net as a catalytic force in turbo-charging consumer-led rebalancing" of the economy.

"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 uncertain and insecure future which continue to grip Chinese families," Mr. Roach said in a commentary in November.


In this Tuesday, Sept. 8, 2009 photo released by China's Xinhua News Agency, rescue workers enter the Xinhua No. 4 coal mine in Xinhua district of Pingdingshan city, central China's Henan Province.

In this Tuesday, Sept. 8, 2009 photo released by China’s Xinhua News Agency, rescue workers enter the Xinhua No. 4 coal mine in Xinhua district of Pingdingshan city, central China’s Henan Province.

Zhaojiuyuan Peng/AP Photo

13 five-year plans:

Defining China's economic history

Five-year plans are not just one of the last surviving symbols of a rapidly changing China's ideological roots. The plans also trace an arc across modern Chinese history, illuminating the most important events and priorities since Mao Zedong took power.Following the command-economy script written by the Soviet Union, Mao's newly installed Communist government implemented the first five-year plan in 1953, with advice and technical assistance from Soviet advisers. Mao wanted to turn China from an agrarian backwater into an industrial powerhouse. "We can make tables and chairs, teacups and teapots," Mao wrote. "But we can't make a single motor car, plane, tank or tractor."

The first plan aimed to accelerate China's industrial output. Mines and factories were given specific quotas. In 1958, Mao implemented the second five-year plan, the so-called Great Leap Forward, an attempt to speed up industrialization using rural communes and "backyard furnaces" that melted down farm implements. The policy led to a famine that killed roughly 20 million people and was so disruptive that five-year plans were suspended until 1966.

The subsequent five-year plans – in 1966 and 1971 – were more ideological, and economic progress again stalled during the chaos of the Cultural Revolution. But with Mao's death in 1976, Deng Xiaoping could begin China's economic transformation with five-year plans in 1976, 1981, 1986 and 1991 – during which Deng took his famous Southern Tour. "Let some people get rich first," he said.

In the late 1990s, with manufacturing booming, then-Chinese president Jiang Zemin championed the reform of China's massive state-owned enterprises and got China into the World Trade Organization in 2001. President Hu Jintao's stated plans to implement reforms were subsumed by the financial crisis, which prompted stimulus that kept things humming – but exacerbated underlying problems.

China's current President, Xi Jinping, used the 12th five-year plan to recalibrate the economy after years of unsustainable export-led growth resulted in debilitating pollution and potentially destabilizing social imbalances. He wants to use the 13th plan to focus on innovation, "greening" the economy and financial-sector reform.

- Iain Marlow

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