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November 10, 2020

Asia

CHINA: Fifth Plenum policy statements signal ambivalence about GDP targets

BY Gabriel Wildau

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  • The Fifth Plenum broke with precedent by not specifying a GDP growth target for the coming Five-Year Plan period covering 2021-25.
  • Follow-on policy statements suggest that China’s leadership is moving to de-emphasize growth targets but is not yet ready to abandon them entirely.
  • A target of doubling GDP by 2035 is ambitious and would likely require some continued reliance on low-quality investment to drive growth, but the phrasing of the target leaves wiggle room.

A previous note analyzed the official communiqué from the Fifth Plenum, which outlined the Communist Party Central Committee’s broad objectives for the 14th Five-Year Plan, covering 2021-25, as well as Long-Range Goals for 2035. On 3 November, official media published two additional documents related to these two plans: the Central Committee’s “advice” for drafting the plans and President Xi Jinping’s “explanation” of the committee’s advice. These documents offer further detail on the economic growth targets that will guide Chinese policy over the next decade and beyond.

Softer targets

The communiqué marked a clear departure from the Fifth Plenums in 2015 and 2010 by declining to specify a GDP target for the coming Five-Year Plan period. As previously noted, Chinese policymakers have been gradually shifting away from rigid GDP targets in recent years, in line with an emphasis on growth quality over quantity. Reliance on such targets has forced policymakers into dangerously loose fiscal and monetary policies and tacitly encouraged low-quality investment. Nevertheless, it remained uncertain whether the party would go as far as to abandon GDP targets entirely.

Xi’s “explanation” suggests a middle-ground approach: policymakers will continue to set targets, but they will be more flexible. Xi said that the country “has hope and potential” to reach “high-income country” status by 2025 and to double GDP or per-capital income by 2035 (presumably from a 2020 baseline, though this was not specified). Xi’s wording falls short of setting a mandatory target, but his statement is still likely to guide Chinese economic policymaking over the next decade.

The Communist Party is fond of targets based on doubling or quadrupling. In 1982, Deng Xiaoping pledged to quadruple China’s economy from 1980 to 2000. In 2002, President Jiang Zemin promised a further quadrupling between 2000 and 2020. In 2012, with actual growth running well ahead of Jiang’s timeline, President Hu Jintao pledged to double GDP from 2010 to 2020. Due to pandemic, that target will be narrowly missed this year, but party leaders appear unconcerned.

Low threshold for “high income”

Xi did not state a threshold for “high-income country,” but he is probably referring to the World Bank’s definition, set at per-capita Gross National Income of at least USD 12,536 in 2020. If so, Xi’s soft target implies GDP growth of 3.9% for 2021-25. This target is not particularly ambitious. China’s per-capita GDP surpassed USD 10,000 in 2019, and the Chinese economy could grow by around 8.5% in 2021 due to post-pandemic catch-up growth and the low base of comparison in 2020.

In March, the National People’s Congress will publish a more detailed outline of the FYP. This outline may include a more explicit and less flexible growth target for 2021-25, as well as an annual target for 2021. Equally possible, however, is that the detailed outline will echo Xi’s phrasing, establishing an aspirational rather than mandatory target.

Quality vs. quantity

Xi’s 2035 target is more ambitious and highlights the fundamental economic policy challenge facing China. Achieving the target would probably require continued reliance on inefficient investment. China has made some progress in shifting to consumption-driven growth over the last decade, with consumption contributing 59% of annual GDP growth on average from 2010 to 2019. Even so, China’s investment share of total GDP (not just GDP growth) remained by far the highest of any large economy at 43% in 2019, down only moderately from 47% in 2010. Given such high rates of investment, consumption alone cannot come close to delivering the overall growth rates necessary to reach the 2035 target.

The risk is that the ambitious target forces local governments to pursue investment in dubious infrastructure and low-end manufacturing to meet the target. In line with the new dual circulation economic strategy, policymakers will seek to redistribute investment towards priority areas like 5G, “smart” infrastructure, semiconductors, and advanced manufacturing. However, a substantial amount of investment in traditional infrastructure, factories, and housing will still be necessary to meet the macro target.

Searching for the “mid-level”

Beyond high-income status by 2025 and doubling GDP by 2035, a third target may also influence economic policy, but the target is vague, so the impact is uncertain. The Fifth Plenum communiqué called for China to achieve “mid-level developed country” status by 2035. This term’s definition is unclear. The World Bank, OECD, IMF, and UN each define various overlapping groups of countries as “high income” or “advanced” or “developed,” using different thresholds. Based on those various definitions, the threshold for “mid-level developed” could plausibly range from per-capita GDP of around USD 23,000 to nearly USD 40,000.

Additional uncertainty arises from the fact that by 2035, other “developed” countries will almost certainly have higher per-capita GDP than they do today, so the income level required to place China in the “middle” of that group will also be higher. Given the vagueness, the party is likely to focus on the clearer 2035 target and then declare that “mid-level developed” status has been reached.