But there's no backtracking on market-based reforms--a fact underlined by fresh steps to liberalize the country's currency market.

By Scott Cendrowski
October 30, 2015
October 30, 2015

After a four-day meeting of Communist Party elites, China has an economic plan for the next five years. The full details won’t be known till March, but in the meantime they released a communiqué that lists many of the core concepts.

The biggest news to come out of the meeting—the relaxation of the country’s one child policy on Thursday –was already evidence that sustaining economic growth was dominating the thoughts of leaders, and that was confirmed in Friday’s statement. The so-called fifth plenum meeting mentioned doubling GDP and people’s income by 2020 from 2010 figures, which would require 6.5% GDP growth over the next five years to become “a moderately prosperous society.”

Meanwhile, there was no backtracking on reforms: retooling the state-owned sector and giving markets more influence, ambitions that were described in a 2013 meeting to outline then-new president Xi Jinping’s grand design. The government wants to rebalance the economy away from heavy industry towards services and is pushing for a higher contribution of consumption in GDP. There’s also an emphasis on innovation, so that Chinese jobs move up the value chain, and a commitment to reduce the state’s interventions that set levels on everything from gasoline to bank account interest rates (a cap on which was recently abolished).

“As expected, the fifth plenum’s statement is light on detail, but the rhetorical emphasis on reform and rebalancing of the economy remains strong,” is what Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings, concluded in a statement.

But, the key condition is this: It’s tough to square reforms when you’re worried about hitting a growth target, and a high one at that, observers say.

“Although we think yesterday’s communique is the latest signal that policymakers are moving in the right direction on reform, it also confirms what we previously suspected – that policymakers will make their job more difficult by pledging to sustain rapid rates of growth,” wrote Julian Evans-Pritchard, China Economist at Capital Economics.

Many economists, moreover, have proven beyond a reasonable doubt that China’s economy is currently growing much more slowly than it’s been saying—in the 4% to 4.5% growth range vs. the official 6.9% of the third quarter. Even the official number was the slowest growth rate in years.

“Such a widening gap between targets and reality will only make China’s plans and policies less credible,” concluded Andrew Batson of Gavekal Dragonomics.

For instance, when provoked with a stock market decline this summer, the government swooped in with $200 billion to support shares and the economy, hardly a harbinger of free market forces. And reform of state-owned companies has so far been weak—Xi has actually talked about continuing to have the SOEs play a dominate role in society.

That’s why it can be tempting to write off the five-year plan pronouncements as nothing but show. But China has a way of following through on most its goals, in a policy direction sense, and understanding them is key to understanding what China is trying to accomplish.

And just in case you doubted that, while the Party plenum was concluding, the People’s Bank of China dropped a bombshell about liberalizing the country’s currency. The central bank said it would allow foreign entities to open settlement accounts at domestic banks and test free convertibility in the free-trade zone at Shanghai. The renminbi posted its biggest one-day gain since March on the news.

Some highlights from the communique from Xinhua before more details are released in coming weeks and months:

  • Experts estimated China must retain an annual growth rate of at least 6.5% in the next five years to reach its goal of doubling 2010 GDP by 2020.
  • Innovation will be put at a core position for China’s development in the following five years.
  • Sectors including political theories, science, technology and culture need to be made more innovative.
  • The Internet will be better integrated with traditional industry to drive economic growth in the next five years.
  • The country will also boost the development of the sharing economy and the big data sector, according to the communiqué.
  • The Party reiterated that China continues to open itself up to the world and participate more in global governance and trade “so as to establish a far-ranging community of shared interests.”

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