Weekly Economic Briefings > Emerging Markets Weekly Economic Briefing

Progress has been made to meet the overall objectives of the 12th Five Year Plan (5YP). However, headway with rebalancing the growth pattern has been less than appears at first sight. Progress in regards to specific structural reforms has been mixed. The 13th 5YP Plan builds on the 12th Plan. While reform seems to be gaining momentum, it is too early to say how crucial reforms such as those of SOEs will pan out.During 2011-15 reform progress was the strongest in areas where the political economy has been favorable. This included reducing red tape, financial reform and raising spending on public services. Progress was more limited in areas where vested interest resistance has been strong, such as SOE reforms and fiscal reforms to enable and incentivize local governments to provide public services to migrants.With regard to the overall objective of rebalancing the growth pattern, the share of the service sector in GDP has risen substantially relative to industry. However, a major part of this shift has been because of sharp falls in output prices in industry rather than changes in output volumes. Indeed, aggravated by too many ill-disciplined firms with soft budget constraints, there is evidence of firms ignoring these price signals and continuing to increase capacity.The share of consumption in GDP has increased, but the share of investment has not fallen by much to date. Looking forward, one of the key challenges for China's economic policymakers is to lower the importance of investment gradually and in an orderly instead of, as has been the experience in several other countries in a similar position, a rapid and disorderly manner.The second broad objective of the 12th 5YP was upgrading of the industrial structure and moving up the value chain. This is happening, and while there is still a long way to go, we think China is well placed to succeed on this front.During the 13th 5YP period, growth remains a priority its GDP growth target is likely to be set at 6.5%. While it is true that some reforms are easier amid solid growth, the insistence on meeting previously set growth targets could detract attention from reform and reduce the appetite for reining in credit growth and reducing excess capacity.To meet such growth targets the outline of the 13th FYP emphasizes measures to upgrade the industrial structure such as boosting innovation, R&D and the internet. Indeed, there is a lot of emphasis in the Plan on how to foster innovation.The jury is still out on the recent SOE reform plan. It contains possibly important positive elements. Amid tension between the objectives of the reform, the key question is how forcefully reforms such as hardening budget constraints, removing excess capacity and levelling the playing field between SOEs and other firms will be implemented in the coming years. Nonetheless, we may see more movement now that a framework exists.Other objectives of the 13th 5YP are rebalancing, green development, improving welfare and reducing poverty and inequality, opening up and going global and ending the one-child policy.