Will the Chinese Government Deliver on the New Five-Year Plan?

Forbes: Helen H. Wang
China Premier Wen Jiabao deliver the Report on...

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With an iron fist to rule out any source of instability, the Chinese government is determined to set the country on the right path. The new five-year plan, unveiled at the National People’s Congress session in Beijing this past week, set ambitious goals for what China would like to achieve in 2015: move to more evenly distributed incomes, a greener environment, and higher up the value chain for its industry.

At the heart of the five-year plan is a focus on boosting domestic consumption and restructuring its economy toward more sustained growth. The plan addresses two critical issues that are of paramount importance to China’s fledging middle class: inflation and affordable housing.

Since last year, the Chinese economy has shown signs of overheating due to the extensive government investment in infrastructure. Food prices rose sharply at 11 percent in February, creating much public anxiety. Skyrocketing real estate prices are like a dagger in the heart of the new middle class who see their dreams of owning homes as unattainable.

The new five-year plan aims to lower GDP growth to 7 percent in an effort to tame inflation. The government also plans to build 36 million affordable homes in the next five years. Premier Wen Jiabao repeatedly stated that improving people’s livelihood is the top priority of the government.  All these measures are intended to address the root problems of public discontent and help maintain social stability.

Reigning in inflation and providing affordable housing are important steps to foster a growing middle class. A major hindrance to increased Chinese consumption, however, is the country’s high saving rate, which reflects the underlying insecurity the Chinese feel about their future.

In writing my book The Chinese Dream: The Rise of the World’s Largest Middle Class and What It Means to You, I interviewed over 100 people in China. They are from all walks of life and are the new members of the Chinese middle class. The biggest concern they have is social security.  Most people I talked to save 25-50 percent of their incomes for a rainy day, as I wrote here.

Victor Ku, a hotel manager in Guangzhou, told me that he had to save two-thirds of his income. “I have to pay for my own health expenses,” he said. “In China, we don’t have security. If you get sick, you can immediately become poor.”

In 2009, the Chinese government announced a plan to spend $124 billion to overhaul the country’s broken healthcare system. Since then, the government has increased insurance coverage in rural areas and allocated funding to build more community clinics.

However, the underlying problems remain as hospitals continue to rely on revenues from drug sales and expensive treatments. World Bank research shows that more than 40 percent of healthcare spending in China goes to purchasing medicine, a disproportionately high amount compared to other countries.

Which leads to another problem that the government has not been able to successfully address: corruption. Corruption is so endemic in Chinese society that it has become a national ill. It ultimately reflects a system that lacks the function of cross-checks, and is a major source of social instability that the government is so firmly intent to prevent.

Stephen Roach, former chairman of Morgan Stanley Asia, believes that the new five-year plan will “spark the greatest consumption story in modern history.”

The next five years will be crucial for China to develop a larger and more stable middle class. Will the government achieve all the goals set out in the plan? Most likely. Judging from its past performance, I would not underestimate the Chinese government’s ability to deliver. Will China become a more open society? Sooner or later, when the Chinese government sees it is in its own interest to let go of control.

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