“Every five years in China, man
They make a new development plan
The time has come for number 13
The “十三五” (shisanwu),
That’s what it means”
This is the refrain of a propaganda video song (https://www.youtube.com/watch?v=m91zBt94Ll0).
It’s weird I can assure you, and it is intended for English speakers, in order to explain how a five-year plan works in China. Now let’s try to underline the main macroeconomic features of the 13th Five-Year Plan (FYP) that goes from 2016 to 2020.
The 13th FYP has been released on the 5th of March during the opening meeting of the fourth session of the 12th National People’s Congress. Li Keqiang, the current Prime Minister, has illustrated the document and it will be the first FYP under Xi Jinping’s presidency.
The main macroeconomic feature of the 13th FYP regards economic growth. China has set a target of GDP growth from 6,5% to 7%. There are two reasons for this specific target.
First, its feasibility. In fact, such a rate is more than respectable considering the trend of global markets and it cannot be reached without any new stimulus. China aims to increase its M2 money supply to 13% (creating Yuan 17,9 trillion in new finance), to expand its fiscal deficit to Yuan 2,18 trillion and to extend its general payments (subsidies) by 12,2%. This will be a crucial point in the next years, since China is already easing its monetary policy and this path might expose Chinese banks to a huge amount of new non-performing loans and bad debts (385$ is the amount of the new lending in last January period only, a historic peak).
Plus, most monetary-fiscal measures in the plan of this year have already been proposed before. There is no evidence of a new, clear and precise path of reforms, which enables China to move from investment-driven to consumption-led growth.
Second, Xi Jinping, the main architect behind this FYP, set the 6,5% target in a broader sense. He set it in order to double the level of GDP reached in 2010 by the end of the decade and to reach the state of “moderately prosperous society” by 2021, 100th anniversary of the Communist party of China’s foundation.
In order to achieve this goal, the government has promised to lift 50 million of people out of poverty and to provide Internet access to 90% rural villages across the country. In a broader sense, this particular topic is a part of a huge spending plan aimed at the building of infrastructures, which is said to be the engine of the Chinese economy in recent times. This plan also regards airports, seaports, bullet trains, subways and expressways.
From an industrial point of view, the 13th FYP stresses the need to reform several SOE (State Owned Enterprise). These SOE are also called “zombies”, due to their overcapacity and oversupply problems. In fact, as a study of the European Union Chamber of Commerce remarked, the production of steel in China is more than the double of the combined production of the US, Japan, India and Russia, given that current demand for such a commodity has dropped. But it is not only about the steel, it also regards other commodities such as aluminium, cement, chemical and heavy equipment. In addition, the utilisation rates of several SOE have steeply decreased. Louis Kuijs of Oxford Economics, a research institute, calculated that in 2015 the output gap between production and capacity was 13,1% for industry overall, and even larger in heavy industry.
In other words, the SOE problems exist and they are huge.
However, the 13th FYP document does not provide precise details on the specifics of the reforms and their timeline implementation. The path of privatisation is not taken into account for sure, while new mergers, reorganizations and debt restructuring seem to be more a favourable way for the government. Still, such a strategy would put more pressure on a monetary-fiscal system, which is already burdened with many responsibilities. Deutsche Bank estimates that a third of the companies that are taking on more debt to cover existing loan repayments is made up of industries with overcapacity.
Unfortunately the lack of precise information in the 13th FYP does not allow further analysis about it. However, it seems clear that the expectations of bold reforms have been deceived, starting from the usual GDP growth target, which despite the Chinese forecast the IMF predicts to be around 6,3% at its best, to the absence of any important market-driving reform.
We can expect the decisions taken by the Chinese government to turn out to be sufficiently correct, but what the actual outcome will be remains to be seen.