Ad Hoc Commentary – China will slowdown from 2016 to 2020

Greece might have stolen the limelight during this year’s IMF/WBG Spring meeting, but amid all the noise, yours truly noted China’s newfound zeal for the environment:

“Ma Jun, chief economist of the People’s Bank of China, offered a snapshot of some of the innovations being discussed in China as the country drafts its 13th Five-Year Plan. In the next five years, he said, China will need about 2 trillion yuan (US$322 billion) in annual investment. The fiscal system can meet about 15 percent of that, he said, leaving a large percentage to be filled by the private sector” http://www.worldbank.org/en/news/feature/2015/04/18/raising-trillions-for-climate-finance

“…China needs Rmb2tn ($320bn) a year in investment over the next five years to meet targets on reducing pollution set by the ministry of the environment, according to the country’s central bank in a report on “green” finance. The report, issued Wednesday [22Apr2015], estimated that China’s budget covered only 15 per cent of the required investment, and called for carbon trading as well as financing tools such as loans, bonds and special funds for green projects…” http://www.ft.com/intl/cms/s/0/f8f3337a-e8d7-11e4-b7e8-00144feab7de.html

After years of growing at breakneck speed, China is probably finally realigning from an all-out-growth-model to a sustainable-growth-model. The not so independent ‘Under the Dome’ documentary on China’s environmental problem was probably the clearest sign of a break from the past:

“…The environmental protection minister, Chen Jining, had said in a news conference as the film was launched: “I think this work has an important role in promoting public awareness of environmental health issues, so I’m particularly pleased about this event.” He compared it to Silent Spring, the film that kickstarted a backlash against pesticide use in the US…” http://www.theguardian.com/film/2015/mar/09/chinese-pollution-documentary-under-the-dome-taken-offline-government

How much will China grow from here? It is anyone’s guess, but if you want a number, then you can probably just take the arithmetic average. For example, Pettis thinks 3-4% while Prassad thinks 6-7%. What about 4.5%-5.5%? http://www.bloombergbriefs.com/content/uploads/sites/2/2015/03/SC_031615-Pettis-Prasad-Debate.pdf

“Planning and targets, both of which are examined and recommended in later chapters, got a bad name from Stalin’s five-year plans because in that infamous case the targets were unashamedly top-down and those involved in implementation manipulated the data to fit the plan and distorted the truth to (appear to) succeed. The science of delivery – recommended here – is not just distinct from this; it is the polar opposite. It says get started, learn fast from the real world, understand the messy reality and adjust the plan accordingly.” page xxv, How to run a government so that citizens benefit and taxpayers don’t go crazy, Michael Barber, 2015

Since China’s 13th Five Year Plan will run from 2016-2020; since it will likely focus on quality rather than quantity of growth; and since the targets will be likely to be treated like edicts from heaven (though the situation is said to have improved in recent years), then it is probably safe to conclude China will lose momentum from 2016-2020. Growth will perhaps even only bottom-out in 2020.

One can almost hear gasps of horrors here. As recently as February 14, we hear: “China needs to guarantee a “bottom line” of 6.5 percent annual economic growth for its 13th five-year-plan, a state newspaper quoted the director of the National Development and Reform Commission (NDRC) Department of Planning, Xu Lin as saying.” http://www.reuters.com/article/2015/02/16/us-china-economics-gdp-idUSKBN0LK06820150216

According to popular belief, China needs high growth or risk social revolution and probably even risk losing the mandate from heaven. There is wisdom in crowds and the belief is probably true. The Chinese bureaucracy needs to adapt to low growth in the coming years. Fighting corruption is good but what people ultimately want is government that is both competent and accountable. It is no secret that negative vibes on government is rampant in China. We differentiate this pressing problem from the recent problem of local government debt which many of us knew from the outset is merely a tempest in a teapot, and Adam Smith would have likely correctly agreed with us:

“V.1.89 The abuses which sometimes creep into the local and provincial administration of a local and provincial revenue, how enormous so ever they may appear, are in reality, however, almost always very trifling in comparison of those which commonly take place in the administration and expenditure of the revenue of a great empire. They are, besides, much more easily corrected.” Wealth of Nations, Book V.1.89, http://www.econlib.org/library/Smith/smWN20.html#B.V, Ch.1, Of the Expences of the Sovereign or Commonwealth

What China need is probably for targets not to serve as the constitution, but for targets to serve as a living constitution. In other words, it had to be adhered to, but not to the point of distorting the truth as in Stalin’s case. Even though China has no elections, Chinese rulers needs to defend its’ mandate from heaven. The ‘science of delivery’ is all about targets, but it treats target more like a living constitution than a constitution cast in stone. Mastering the ‘science of delivery’ would probably be a way for the Chinese bureaucracy to survive in the coming 5-year-drought in growth.

If you are currently thinking that the above suggestion would not work it is likely because you have not read up on the ‘science of delivery’. Frankly the phrase ‘science of delivery’ is an awful phrase and does not conjure up positive images. We can safely say the phrase ‘science of delivery’ is bad for politics. When yours truly first heard of the phrase ‘science of delivery’, yours truly thought it was about gynecology. As a brand, ‘science of delivery’ is probably no better than ‘deliverology 101’, the title of an earlier book written by Michael Barber. You will likely be surprised as yours truly was to know that some important people do listen to Mr Barber: “During his tenure at Darthmouth College, Jim Yong Kim [currently World Bank Group President] took to carrying Deliverology 101 around with him – or so he told me when we met.” page xix, How to run a government so that citizens benefit and taxpayers don’t go crazy, Michael Barber, 2015

Once you can get past all the awful phrases, you will find real gems. Take for instance, the book ‘How to Run a Government’, which sounds like one of those usually worthless self-help books, has a nifty 57 items list. Item 19 within the book explains why contracting out services break monopolies. Item 20 goes on to say why well-designed privatization improves efficiency. In addition, Item 56 explains that successful markets and effective government goes together.

In my humble opinion, Mr Barber should have at least consulted his ex-boss Tony Blair who was widely recognized for popularizing the phrase public-private partnerships: “…But Blair and his government wanted to put their own stamp on it. As The Economist put it (EIU, 2002, p. 2), they adopted a new label, ‘the friendlier-sounding Public-Private Partnerships (PPP)’, to play down the Conservative origins. But it was a reconceptualizing as well as a renaming, involving a new commitment to joint intersectoral action as a way of transforming the role of government. So, in what became ‘an ideological project’ (Ruane, 2002, p. 201; and see Hall et al., 2003, p. 2), PFI was transformed into PPP…” page 24, International Handbook of PPP, Graeme A Hodge, 2010

China can call the effort to improve public sector delivery as PPP+, the plus being the science of delivery. PPP+ is a much better sounding brand that can capture the imaginations of both citizens and the civil service – sounds like using the invisible hand to improve efficiency, productivity and accountability. Both PPP and delivery science are fashionable today. They are frequently used, but very few know the real secrets that distinguish those that will succeed and those that don’t. Yours truly trust the Chinese will invent a way to make PPP+ succeed and as a consequence keep their mandate from heaven despite the probable low growth ahead. Didn’t they say necessity is the mother of invention?

In any case, China will very likely slowdown from 2016 to 2020. Yours truly believe that growing at 5% will be remarkable in itself for that 5-year period.

Good luck in the markets.