Tsinghua Professor Slams China’s Inability to Implement 13th 5-Year Plan

By Valentin Schmid, Epoch Times
April 22, 2016 9:20 am Last Updated: April 26, 2016 5:51 pm

When Chinese professors come abroad to talk about the economy, they usually toe the party line. Justin Lin, a professor at Peking University, for example, said the following at a New York meeting in January.

“Debt is good. It depends on how you use the debt. If you use if for productive investment, if you have higher debt … you generate return to pay back the debt.” His general message was that China didn’t really have any problems and growth would just continue as normal (6-7 percent).

This is why Gao Xiqing’s contribution to a panel discussion at the Council on Foreign Relations on April 19 was all the more remarkable. The professor of law from Tsinghua university admitted he was being monitored by the regime and had to be careful what he said, but nonetheless slammed the country’s inability to implement the next five-year plan for economic reform, coming into effect this year.

If you cut down the most efficient ones, so be it.
— Gao Xiqing, professor, Tsinghua University

But Gao is not your ordinary professor, he is also the former president and chief investment officer of the China Investment Corporation, China’s sovereign wealth fund.

“They are giving up to let the market be the deciding force for allocating resources. Are we allowing it to be the decisive force? Doesn’t look like it,” he said. The 13th five-year plan calls for a reduction in overcapacity, a general reform of state-owned enterprises (SOEs) and the loosening of China’s capital controls.

One example is the goal of reducing overcapacity in sectors like steel for example, which was mainly caused by local governments going overboard with fixed asset investment. The central government repeatedly requested local governments to close down inefficient firms, which is a sensible thing to do.

However, because local governments do not have an incentive to do so and stalled on implementation, the regime now forces them to close down a certain number of plants and companies, regardless of whether they are operating efficiently or not.

Tim W. Ferguson, editor of Forbes Asia (L); Gao Xiqing, professor at Tsinghua University (2L); Karen Harris, managing director at Bain & Company (2R), and Brad W. Setser, senior fellow at the Council on Foreign Relations (R) discuss China's 13th five-year plan at the Council on Foreign Relations in New York on April 19, 2016. (Valentin Schmid/EpochTimes)
Tim W. Ferguson, editor of Forbes Asia (L); Gao Xiqing, professor at Tsinghua University (2L); Karen Harris, managing director at Bain & Company (2R), and Brad W. Setser, senior fellow at the Council on Foreign Relations (R) discuss China’s 13th five-year plan at the Council on Foreign Relations in New York on April 19, 2016. (Valentin Schmid/EpochTimes)

“All steel mills are around Beijing. We’ve been saying: Cut that down. Now we don’t care which companies you cut down, just cut down by 35 percent. If you cut down the most efficient ones, so be it,” Gao said. “The central government is finally coming out with a number. But it’s so bad they are not going to be able to control between efficient and inefficient.”

This is a pattern often repeated in Chinese investment booms and bust because the central government just cannot incentivize local government to do the sensible thing economically, which leads to policies throwing out the baby with the bathwater, according to Mark DeWeaver who wrote a book about Chinese investment patterns called “Animal Spirits With Chinese Characteristics.

This government, in economic terms, is captured by different interest groups.
— Gao Xiqing, professor, Tsinghua University

In addition, powerful interest groups prevent the central government from implementing reform, the biggest ones, according to Gao, are the very SOEs the next five-year plan is supposed to reform.

“This government, in economic terms, is captured by different interest groups. The biggest interest group is SOEs… They say we don’t want to push forward. Our people are not incentivized to do things,” Gao said. Every inefficient state enterprise and people with power and strings to pull, they will get the loans from the banks.”

DeWeaver notes in his book: “The bankers, whose primary allegiance is to the Party rather than to their institutions, still have little choice but to support local government projects.”

Services to the Rescue?

Not beholden to CCP surveillance, Bain & Company managing director Karen Harris did not have to beat around the bush, although she spoke about another problem in China’s reform policy.

Ever since China’s economy started to slow, the regime and Western analysts have continuously pointed out that while manufacturing was in decline, the service sector is in fact booming. In principle, Harris doesn’t disagree, but points out that there is a slight difference between the two types of work.

“Service sector jobs have been growing. Service sector jobs aren’t higher paying jobs than factory jobs,” she said. “One-third of them are large companies’ jobs. Two-thirds are sole proprietorships, which is to say bodegas. They do not lead to higher household spending.”

So China’s service revolution is centered around hairdressers and street vendors. Hardly the stuff dreams are made off. The China Beige Book survey of thousands of companies in China corroborates that view.

If economic reform is seen at a lesser level to enhance the security of the state, it is going to be sidelined.
— Karen Harris, managing director, Bain & Company

The last report indicated that revenues were increasing at only 47 percent of service related companies and the biggest increase came in the healthcare subsector, which means additional nurses on top of the hairdressers and street vendors, although the China Beige Book only surveys large companies and disregards sole proprietorships.

Harris also pours cold water over the China tech story for the same reasons. Most of the start-ups are small companies not employing many people. As for the large ones, she says they did well in China because they have had special protection.

“Some of the most successful tech companies are uniquely situated in their isolated environment. If you are protected from international competition by regulation, you can be very successful,” she said.

As for further economic reform, Harris is not optimistic, as analysts and observers need to keep the party’s prime directive in mind. “Wealth creation is there to increase the security of the state. If economic reform is seen at a lesser level to enhance the security of the state, it is going to be sidelined.”