In Conversation with Geng Xiao: On NPC 2016

What big picture items are being unveiled at the National People’s Congress this year?

China is shifting into its 13^th Five-Year Plan this year while the economy is slowing. The National People’s Congress has focused on detailed plans and strategies of maintaining growth as well as shifting towards a new growth and development model that is innovative, coordinated, green, open (encouraging more integration with the global economy), and inclusive (narrowing the gap between the rural and urban population and eliminating extreme poverty).

The current Five-Year Plan is crucial because it is the period China’s leaders would like to see the country’s living standards grow beyond the middle income level through continued urbanization and improved productivity.

This year’s NPC put emphasis on both growth stabilization and structural reform. While structural reforms have been discussed extensively in the past three years, the focus this year will be more balanced towards short term stabilization due to slowing domestic and global economies as well as high volatilities in the capital and foreign exchange markets over last nine months. Fiscal policy has been strengthened, monetary policy has become more supportive and there are many specific projects proposed in the Five-Year Plan which have been highlighted in the media.

What outcome is the government looking for?

The objective of the NPC is to approve the Five Year Plan and ensure the delegates have a clear picture on the way forward with the growth and reform. Hence, it is crucial for the leaders to clearly communicate the government’s plans and the implementation strategies. Clearly the governments have put together a very comprehensive plan. Premier Li Keqiang has also highlighted a lot of specific targets for the government to achieve: he has asked for value added tax reform to be completed before May 1 this year, which is a tremendous challenge. He has also set a specific growth rate target of 6.5 to seven per cent, which the country needs in order to move out of the middle income trap.

Aside from all this, the NPC is trying to sort out many domestic development issues so as to lay out a good foundation for China’s hosting of this year’s G20 meetings in September. Of course, the issues that will be addressed in the G20 are more global, but the uncertainties about China’s economy is causing many concerns among global investors and policymakers.

That is why I think this NPC is very important because the results can really help people both inside and outside China to understand better the dramatic economic transformation of China and the associated risks and opportunities.

Will China’s current economic situation weigh in at all during the NPC?

Because the size of China’s economy is much bigger now, its health will have a much larger impact on the global economy. So China’s NPC is not only relevant for Chinese but also for the rest of the world.

The Chinese leaders are trying to do many things at the same time with good reasons, which is not easy. They are committed to carrying out structural reform, but have also realized that they need to go more slowly on matters pertaining to short term macro stability. For example, they are basically going back to a more stable exchange rate regime so that the gradual opening of China’s capital account would not trigger any panic cross-border capital flights.

China also need to deal with diverse situations of property markets. While housing prices in the 3^rd and 4^th tier cities continue to be on the decline due to outflow of population and over-investment, the property prices in a few 1^st tier cities are still rising rapidly due to inflows of population and limited supply under stricter government regulation on land.

Investors are learning quickly about the complexity of China’s economic conditions: that it has a lot of problems as well as growth potentials and opportunities.

What are China’s chances of meeting this potential?

The Five-Year Plan is the result of decades of planning practice within the Chinese system, yet there are still frustrations involved with its implementation. Beautiful plans are not easily implemented because governance systems change slowly. There is a gap between what officials hopes to achieve and what they have been able to do, but I think that is part of the reality which China has undergone many times in the last three decades. Reform itself is a trial and error process.

And we can see this playing out in the last three to nine months. The government has admitted to making mistakes. Some heads of regulators have been changed. Officials have corrected policy missteps. This process will continue. From a historical perspective, what we are seeing is a normal process of dynamic reform: there are a lot of tensions and debates over which way to go, what to adopt and so on.

The key to appreciating the change process is to remember that China is a continental-sized economy; it has a lot of problems to be fixed; it needs some basic social and political stability to carry out successfully its mid-flight repairs; so there will be priorities. Political, social and economic stability is high on the leadership’s agenda, and there will be tension when stability is prioritized over some necessary reforms and aspirations.

The big picture shows that things are moving forward, even though not as good as people’s aspiration. The plan is clearly positive and encouraging but a lot of work still lies ahead.