In March 2016, the Chinese government released its 13th Five-Year Plan at the end of the National People’s Congress Annual Meeting. The plan sets a blueprint for China’s policies and economic and social development goals for 2016–2020. With over 80 chapters, the document is full of details that are critical for informing LAC governments’ understanding of where China wants to be in the next five years.
At a moment when LAC’s trade with China is facing headwinds, countries from the region should start developing strategies in order to better adjust to China’s new realities.
Here are some of the highlights from China’s new Five-Year Plan that matter to LAC countries:
China has set a series of economic targets for the years to come. The government intends to stay on track with economic rebalancing and aims to achieve GDP growth of 6.5%–7% per year over the next five years. According to the government’s estimations, GDP per capita in 2020 will double in comparison to 2010, and disposable income per capita will reach US$4,600. For that to happen, the government is counting on urbanization levels reaching 60% (they now stand at 56%) and on the creation of more than 50 million jobs over the next five years.
Dealing with overcapacity:
The plan states that China will actively and steadily resolve the overcapacity issue. As a result of a series of government incentives over the last decade, China has expanded its production capacity in a wide range of sectors. This problem is more evident in the steel and coal sectors, where China estimates that overcapacity is at 25%–30%. The government has selected the steel sector as the first to be dealt with and has formulated policies to tackle this issue. The plan shows that these policies revolve around creating a government fund for layoffs, reforming bankruptcy laws, and promoting mergers and acquisitions. This reform cuts both ways for LAC. While most LAC countries may feel a sense of relief from Chinese steel competition, other countries will possibly see decreases in iron ore exports to China now that steel demand is bound to decline.
The government plans to optimize the structure of fiscal expenditure in agriculture and increase the performance of agricultural subsidies. The plan also states that China will overhaul minimum price control policies. After the fiasco with minimum price purchase policies in the cotton and sugar sectors over the last decade, which led the Chinese government to incur losses and boost reserves of both commodities, China plans to streamline spending with this initiative and sell its bloated reserves. In the short term, this will have negative impacts on LAC’s sugar and cotton exports, but in the medium term, exports should rebound after China rebalances its reserves. In addition, China intends to accelerate improvements to agricultural standards in accordance with international standards. Changes in standards are welcomed by LAC countries that struggle to export to China given sanitary and phytosanitary restrictions. The more China’s standards comply with international patterns, the better for the region’s agriculture exports.
Foreign direct investment and outward direct investment:
China aims to expand the scope of permitted sectors for foreign direct investment, especially service sectors such as nurseries, architecture, accounting, auditing, banking insurance, and securities. When it comes to more traditional industrial sectors, the government wants to promote FDI in the central and western areas of China. The plan does not mention changes to address old demands from foreign countries to access regulated sectors where the foreign firm cannot hold more than 50% of the company’s shares, such as automobiles, aviation, and some machinery and equipment segments. In terms of outward direct investment, China wants to improve its overseas investment plan by redefining priority areas and sectors. The plan also states that China will expand the number of trade promotion agencies in foreign countries in order to better identify investment opportunities to China. Lastly, the plan mentions that China will continue with the strategy to develop commodity production bases overseas.
Trade and WTO recognition:
The plan states that China recognizes the multilateral trading system as the primary framework for the country’s trade with the world. China expects that in the next five years, WTO members will recognize it as a market economy, and it will actively pursue and engage in WTO trade negotiations. LAC countries are in the process of assessing the pros and cons of recognizing China as a market economy and have yet to make a final decision. In addition, the country plans to expand FTA and BIT agreements with other countries, especially those directly affected by the Silk Road initiative and with Korea and Japan.
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