What China’s five-year plan should really say

It is good to have New Year’s resolutions. But it is better to have the right ones. The Communist Party of China’s five-year plans used to be a chance to set rigid targets, with little thought given to sustainable reform. Now China, no longer a command economy, is at a critical transitional stage. This year, the Party has a chance to try harder.The 12th five-year plan due on October 15 is likely to focus on uncontroversial issues like social welfare, urbanization and the environment. All worthy causes. But China is already driving hard toward them. Instead, are five suggestions for new goals that might work wonders.1. Stop targeting GDP growth
Setting a growth target for the five years sends the wrong message. Over-achieving local governments merely use it as an excuse to beat the target at any environmental or social cost. China also beats its own GDP targets as a matter of routine, which makes them pointless. Growth of 11.1 percent from 2006 to 2010 smashed the official goal of 7.5 percent.

2. Start targeting balanced trade instead
China’s current account surplus fell 30 percent in 2009, but was still the second-largest in the world after Saudi Arabia. The surplus is expected to be 4 percent of its GDP in 2011. That causes friction with trade partners like the United States, and leaves China burdened with a pile of foreign currency that is $2.5 trillion and counting. A new target — say bringing the surplus down to 3 percent in the next five years — would make China more balanced, and might get opponents off its back.

3. Reform the yuan
Beijing needs to convince the world that it is serious about adjusting the value of its currency. The yuan has risen 2 percent against the dollar since late June, but fallen 12 percent against the euro and 6 percent against the yen. A stronger yuan would put more power in consumers’ hands, and give China a way to combat inflationary pressures.
A good step would be to promise some appreciation against a basket of currencies, rather than recent empty comments about making the yuan more reflective of supply and demand. A detailed roadmap for China’s grand plan of making the yuan an international currency would also help convince that yuan reform is more than a pipe dream.

4. Let the market decide the price of money
China’s central bank fixes the highest deposit rate at just 2.3 percent, lower than the official inflation target of 3 percent. Big corporates are subsidized by cheap loans. Banks enjoy a fat lending margin. Faithful depositors lose out.
Beijing is trying to crack down on banks which lure depositors with other incentives, when it should be allowing more competition for deposits through market rates. When the cost of money goes up, investors are likely to be more discerning of risks. That may direct money from capital intensive sectors, such as heavy industries, to labor intensive sectors like services. It couldn’t be done overnight — but it could probably be achieved over five years.

5. Reduce the role of the state

During the past seven years, the number of state-owned enterprises fell, but their assets tripled to $3 trillion, revenues quadrupled to $1.9 trillion, and profits more than tripled to $122 billion. State fiscal revenues have been outpacing growth of GDP and incomes, and the government actually topped up its investments in big banks when they raised capital this year.To promote consumption, the state needs to share more wealth with its people. The private sector faces an uphill battle competing against powerful SOEs. Yet innovation is more likely to come from entrepreneurs than civil servants. And there are financial risks of holding big equity stakes: to participate in bank rights issues, the government leveraged up its own balance sheet.Most of these five goals aren’t likely to appear in this five-year’s plan. Maybe they will be in the next one. But if China is serious about sustainable economic growth, putting these to the top of the agenda would be a good start – Reuters