In early March, China’s National People’s Congress approved its 12th Five-Year Plan (2011-2015). Under this China will change the character of China’s economic model — moving from the export- and investment-led structure of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers.
The plan will force China to rethink the core value propositions of its economy. Premier Wen Jiabao laid the groundwork for this four years ago, when he first articulated the paradox of the “Four ‘uns’” — an economy whose strength on the surface masked a structure that was increasingly “unstable, unbalanced, uncoordinated, and ultimately unsustainable.”
Why now?
The Great Recession of 2008-2009 suggests that China can no longer afford to depend upon the external demand alone. That leaves China’s government with little choice other than to turn to internal demand and tackle the Four Uns head on.
12th Five-Year Plan China
12th Five-Year Plan China (Photo Credit: yifeiliu.files.wordpress.com)
First, China will begin to wean itself from the manufacturing model that has underpinned export- and investment-led growth for 30 years. This model increases dependence on capital-intensive, labor-saving productivity enhancement making China incapable of absorbing the country’s massive labor surplus. Under the new plan, China will adopt a more labor-intensive service model.
China will develop large-scale transactions-intensive industries such as the wholesale and retail trade, domestic transport and supply-chain logistics, health care and leisure and hospitality. It would provide China with much greater job-creating potential.
The employment content of a unit of Chinese output more than 35 percent higher in services than in manufacturing and construction. China could actually hit its employment target with slower GDP growth.
Moreover, services are far less resource-intensive than manufacturing — offering China the added benefits of a lighter, cleaner and greener growth model.
Second focus would be to boost wages. Under this the main focus will be the lagging wages of rural workers, whose per capita incomes are currently only 30 percent of those in urban areas. China intends to bring reforms for this. Tax policies aimed at boosting rural purchasing power, measures to broaden rural land ownership and technology-led pro-grams to raise agricultural productivity are the reforms it’s targeting.
China will also implement policies that foster ongoing and rapid migration from the countryside to the cities. Since 2000, annual rural-to-urban migration has been running consistently at 15-20 million people. For migration to continue at this pace, China will have to relax the long-entrenched strictures of its hukou, or household registration system, which limits labor-market flexibility by tethering workers and their benefits to their birthplace.
China plans boosting employment via services, and lifting wages through enhanced support for rural workers. Chinese personal income, now run at just 42 percent of GDP — half that of the United States. More than higher growth in income from labor will be needed to boost Chinese private consumption. Major efforts to shift from saving toward spending will also be targeted.
Last but not the least would be building a social safety net in order to reduce fear-driven, precautionary saving. Specifically, that means social security, private pensions, and medical and unemployment insurance — plans that exist on paper but are woefully underfunded. It will also focus on accelerated development of several strategic emerging industries — from biotech and alternative energy to new materials and next-generation information technology.
The defining feature
Emphasis on the Chinese consumer will be the new plan’s defining feature. China plans to boost private consumption as a share of Chinese GDP from its current rock-bottom reading of around 36 percent to somewhere in the 42-45 percent range by 2015.
It would also be a huge boost for China’s major trading partners — not just those in East Asia, but also growth-constrained European and U.S. economies. The 12th Five-Year Plan is likely to spark the greatest consumption story in modern history. Today’s post-crisis world could hardly ask for more.
Shifting to a more consumption-led dynamic, China will reduce its surplus saving and have less left over to fund the ongoing saving deficits of countries like the U.S.
Changing face of China’s economy
Trade deficits are not a blip but part of a developing trend in the Chinese context. For the first time in seven years international trade in China has recorded a quarterly trade deficit.
The deficit in March 2010 and again in February 2011, are not just blips in the statistics. The blip is a result of sustained efforts to drive and develop domestic demand. China’s international trade surplus was at $295 billion in 2008. It dropped in 2009 to $196 billion and then to around $183 billion in 2010.
Chinese international imports grew by around 32 percent year-on-year in the January-March quarter. China now imports more than the United States on a three-monthly average. US imports rose by a monthly average of $27 billion and China’s monthly average was $33 billion.
Branding China
One major factor in China’s efforts to shift from manufacturing and export led growth to service and consumption led growth would be branding. In the Interbrand Best Global Brands rankings for 2010, the United States, the only economy currently larger than China’s, had 47 brands in the top 100, headed predictably by Coca-Cola. No China brand made the list at all. Nonetheless, the Chinese economy marches on with near double-digit growth whereas the United States has near-zero interest rates to breathe life back into its economy.
Finland has the only non-American brand in the top 10 with Nokia. Germany has no fewer than 10 in the top 100, the biggest being Mercedes Benz; France eight, mostly in luxury goods such as Louis Vuitton and Cartier; and the United Kingdom five, headed by banking giant HSBC. Even Switzerland, with a population of 7.8 million compared to China’s 1.3 billion, has five brands in the listings, the biggest being Nescafe and food giant Nestle.
Chinese companies have to develop into truly world-class brands in order for China is to achieve.
China cannot rely on low costs and high volume manufacturing. China is already facing this problem. Shanghai, in particular, and the eastern coastal region is no longer a cheap place to manufacture any more its future economic ambitions.
Branding is fundamental and not some promotional song and dance. It really starts with a shareholder discussion about the entire purpose of the firm and then ends up in thousands of retail stores around the world where exactly that promise is brought to life
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