New emphasis on structural change in economy subverted by officials’ self-interest
Cary Huang in Beijing 08 February 2011
China’s five-year plans may have changed, but officials’ attitudes are proving harder to modify.
A switch of focus by the central government five years ago, emphasising structural transformation of the economy, failed to alter officials’ obsession with numerical targets - the major influence on their promotion prospects.
The 11th five-year plan, which expired at the end of last year, spelt out only a few key numerical targets and focused on reform and restructuring of the economy in order to achieve sustainable growth and social harmony.
But numbers again dominated the news between 2006 and 2010, with China’s gross domestic product averaging double digit annual growth and its share of the global economy jumping from 4.9 per cent to 9.3 per cent.
China is now the world’s wealthiest nation in terms of its near US$3 trillion in foreign reserves, the world’s largest car producer and consumer, and home to the world’s longest high-speed railway system.
It reached or exceeded all eight obligatory targets in the last five-year plan: population control; energy and water consumption per unit of GDP; reduction in emissions of two major pollutants; area of cultivated land; urban social security coverage; and rural co-operative medical coverage.
It also exceeded most of the plan’s 14 indicative targets.
But little progress was made in relation to the 11th plan’s most emphatic priorities: advancing market-oriented reforms; reducing the role of state-owned enterprises (SOEs) in the economy; achieving balanced and sustainable growth; and narrowing the income gap.
“Despite enormous achievements, there are three unresolved issues left over from the 11th five-year plan,” Mizuho Securities chief China economist Jianguang Shen said in a recent research report.
“The economic structure is less balanced; state influence has risen while the private sector has suffered; and income disparity has increased.”
Shen said the government had failed to shift growth away from an over-reliance on fixed-asset investment and towards private consumption, reduce its trade surplus or increase the service sector’s share of the economy.
“The investment ratio rose further, while the consumption ratio dived. The current account surplus reached record highs and the share of services remained stagnant,” Shen said.
SOEs have experienced tremendous growth in the past five years due to the inherent advantage of government backing, but private firms face more challenges. There are 30 SOEs among the Global Fortune 500 companies, up from just six in 2002, while only one privately held Chinese firm has made the list.
In a recent report, the Ministry of Human Resources and Social Welfare warned that income disparity was becoming so extreme that drastic measures could be necessary to close the gap in the 12th five-year plan.
The ministry said the wealth gap had widened in past few years, with incomes in urban areas three times higher than those in rural areas, and the average income of the top 10 per cent of earners 20 times higher than that of the bottom 10 per cent of earners.
It did not give comparative figures for the situation five years ago.
There was also no significant progress on the 11th plan’s promises to push ahead with reform of electricity, oil and natural gas prices.
“China seems to be on track to meet most quantitative targets. But progress on structural changes has been slow,” said UBS Securities China economist Wang Tao. “Although the government emphasised the need to change the traditional investment and export-led growth model in the 11th plan, there was little progress in the past five years.”
Wang said household consumption’s share of GDP had declined, while the relative importance of investment and the current account surplus had increased.
In an editorial commenting on the government’s performance during the 11th five-year plan, the outspoken Century Weekly said it had failed to accomplish most descriptive goals. It also listed the failure to tame state-owned monopolies and end discrimination against private enterprises, and the failure to launch taxation and pension reform.
“Worse still, lagging political reform and a lack of effective supervision over party and government authorities have led to frequent abuses of civil, personal and property rights, illicit land acquisitions, home demolitions that uproot residents and environmental degradation,” it said.
The editorial went on to say that China’s widening income gap had been caused primarily by a distorted system and mismatched jobs, and warned that delaying political reform would lead to serious social and political consequences.
The worst setback was the government’s failure to meet its promise to rein in the runaway property market - listed as one of the policy priorities in the 11th five-year plan.
It pledged to “strengthen its control over the primary and secondary property markets, and strictly restrain the development of luxury commercial apartments” and to build “sufficient” subsidised houses for low-income families, without setting any numerical targets.
Housing prices in Shanghai and Beijing doubled in less than four years before the global financial crisis struck in 2008 and climbed steeply again last year, prompting Premier Wen Jiabao to acknowledge recently that his government had failed to address the problem successfully because “until now, the measures have not been implemented well”.
Professor Hu Xingdou, an economist at Beijing Institute of Technology said local governments had only met about 20 per cent of their targets for building subsidised homes.
Hu said the central government had moved to increase supply and suppress speculative demand but those moves had been undermined by local governments. Analysts said the key to the success or failure of policy implementation was whether it would benefit officials pursuing their own vested interests.
Yi Xianrong, an economist with the Chinese Academy of Social Sciences, a top central government think tank, said: “What has been achieved are those policies that mean huge benefits for officials, and what has not been achieved are those that mean pay for no gain.”
Ting Lu, a China economist with Bank of America and Merrill Lynch, said the drafting of five-year plans was usually a process in which idealism dominated pragmatism and rhetoric dominated logic.
“People tend to get very excited once every five years by imagining a brand new world, as if all those blueprints will be delivered strictly as planned,” Lu said.
“While top policymakers in Beijing are lavish on descriptive goals, such as narrowing income inequality, but stingy on numerical projections, such as GDP growth, ministries, quasi-government industrial associations and local officials tend to inflate their investment plans by churning out staggering numbers, usually on the scale of trillions.”
Lu said the tweaked messages from the numerous five-year plans at the central and local levels would affect the financial markets for several months.
“There will be gainers and losers. Those who can separate illusion from reality and those who can time the markets’ mass psychology can benefit from the process,” he said.
Lu said five-year plans were often intertwined with political cycles and this would be especially true for the 12th five-year plan, which will span a government reshuffle expected in early 2013.
“Top officials will be too cautious in the run-up to the handover in 2013, but it might take a couple of years for new leaders to consolidate their powers after early 2013 to carry out any tough reform plans,” Lu said, explaining that was why many plans were not strictly implemented.
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Road ahead plagued by culture of greed
New emphasis on structural change in economy subverted by officials’ self-interest
Cary Huang in Beijing
08 February 2011
China’s five-year plans may have changed, but officials’ attitudes are proving harder to modify.
A switch of focus by the central government five years ago, emphasising structural transformation of the economy, failed to alter officials’ obsession with numerical targets - the major influence on their promotion prospects.
The 11th five-year plan, which expired at the end of last year, spelt out only a few key numerical targets and focused on reform and restructuring of the economy in order to achieve sustainable growth and social harmony.
But numbers again dominated the news between 2006 and 2010, with China’s gross domestic product averaging double digit annual growth and its share of the global economy jumping from 4.9 per cent to 9.3 per cent.
China is now the world’s wealthiest nation in terms of its near US$3 trillion in foreign reserves, the world’s largest car producer and consumer, and home to the world’s longest high-speed railway system.
It reached or exceeded all eight obligatory targets in the last five-year plan: population control; energy and water consumption per unit of GDP; reduction in emissions of two major pollutants; area of cultivated land; urban social security coverage; and rural co-operative medical coverage.
It also exceeded most of the plan’s 14 indicative targets.
But little progress was made in relation to the 11th plan’s most emphatic priorities: advancing market-oriented reforms; reducing the role of state-owned enterprises (SOEs) in the economy; achieving balanced and sustainable growth; and narrowing the income gap.
“Despite enormous achievements, there are three unresolved issues left over from the 11th five-year plan,” Mizuho Securities chief China economist Jianguang Shen said in a recent research report.
“The economic structure is less balanced; state influence has risen while the private sector has suffered; and income disparity has increased.”
Shen said the government had failed to shift growth away from an over-reliance on fixed-asset investment and towards private consumption, reduce its trade surplus or increase the service sector’s share of the economy.
“The investment ratio rose further, while the consumption ratio dived. The current account surplus reached record highs and the share of services remained stagnant,” Shen said.
SOEs have experienced tremendous growth in the past five years due to the inherent advantage of government backing, but private firms face more challenges. There are 30 SOEs among the Global Fortune 500 companies, up from just six in 2002, while only one privately held Chinese firm has made the list.
In a recent report, the Ministry of Human Resources and Social Welfare warned that income disparity was becoming so extreme that drastic measures could be necessary to close the gap in the 12th five-year plan.
The ministry said the wealth gap had widened in past few years, with incomes in urban areas three times higher than those in rural areas, and the average income of the top 10 per cent of earners 20 times higher than that of the bottom 10 per cent of earners.
It did not give comparative figures for the situation five years ago.
There was also no significant progress on the 11th plan’s promises to push ahead with reform of electricity, oil and natural gas prices.
“China seems to be on track to meet most quantitative targets. But progress on structural changes has been slow,” said UBS Securities China economist Wang Tao. “Although the government emphasised the need to change the traditional investment and export-led growth model in the 11th plan, there was little progress in the past five years.”
Wang said household consumption’s share of GDP had declined, while the relative importance of investment and the current account surplus had increased.
In an editorial commenting on the government’s performance during the 11th five-year plan, the outspoken Century Weekly said it had failed to accomplish most descriptive goals. It also listed the failure to tame state-owned monopolies and end discrimination against private enterprises, and the failure to launch taxation and pension reform.
“Worse still, lagging political reform and a lack of effective supervision over party and government authorities have led to frequent abuses of civil, personal and property rights, illicit land acquisitions, home demolitions that uproot residents and environmental degradation,” it said.
The editorial went on to say that China’s widening income gap had been caused primarily by a distorted system and mismatched jobs, and warned that delaying political reform would lead to serious social and political consequences.
The worst setback was the government’s failure to meet its promise to rein in the runaway property market - listed as one of the policy priorities in the 11th five-year plan.
It pledged to “strengthen its control over the primary and secondary property markets, and strictly restrain the development of luxury commercial apartments” and to build “sufficient” subsidised houses for low-income families, without setting any numerical targets.
Housing prices in Shanghai and Beijing doubled in less than four years before the global financial crisis struck in 2008 and climbed steeply again last year, prompting Premier Wen Jiabao to acknowledge recently that his government had failed to address the problem successfully because “until now, the measures have not been implemented well”.
Professor Hu Xingdou, an economist at Beijing Institute of Technology said local governments had only met about 20 per cent of their targets for building subsidised homes.
Hu said the central government had moved to increase supply and suppress speculative demand but those moves had been undermined by local governments. Analysts said the key to the success or failure of policy implementation was whether it would benefit officials pursuing their own vested interests.
Yi Xianrong, an economist with the Chinese Academy of Social Sciences, a top central government think tank, said: “What has been achieved are those policies that mean huge benefits for officials, and what has not been achieved are those that mean pay for no gain.”
Ting Lu, a China economist with Bank of America and Merrill Lynch, said the drafting of five-year plans was usually a process in which idealism dominated pragmatism and rhetoric dominated logic.
“People tend to get very excited once every five years by imagining a brand new world, as if all those blueprints will be delivered strictly as planned,” Lu said.
“While top policymakers in Beijing are lavish on descriptive goals, such as narrowing income inequality, but stingy on numerical projections, such as GDP growth, ministries, quasi-government industrial associations and local officials tend to inflate their investment plans by churning out staggering numbers, usually on the scale of trillions.”
Lu said the tweaked messages from the numerous five-year plans at the central and local levels would affect the financial markets for several months.
“There will be gainers and losers. Those who can separate illusion from reality and those who can time the markets’ mass psychology can benefit from the process,” he said.
Lu said five-year plans were often intertwined with political cycles and this would be especially true for the 12th five-year plan, which will span a government reshuffle expected in early 2013.
“Top officials will be too cautious in the run-up to the handover in 2013, but it might take a couple of years for new leaders to consolidate their powers after early 2013 to carry out any tough reform plans,” Lu said, explaining that was why many plans were not strictly implemented.
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