China may soon have a new export — culture. The Communist Party has named culture as a “pillar industry” in its 12th five-year plan, previewed on Oct. 18. That’s a worthy goal. Compared to former pillars like property and autos, media might actually help the economy rebalance. Yet the Party may find culture a lot more difficult to manufacture than cars and condominiums.
The growth of movies, games, and tourism could be huge. An average Chinese spends just 8 percent of what a typical American does on recreational services in dollar terms, according to Morgan Stanley. Old pillars now look less racy. As many as 88 percent of urban dwellers now own their homes, according to official data, and China is already the world’s largest auto market.
It is good to have New Year’s resolutions. But it is better to have the right ones. The Communist Party of China’s five-year plans used to be a chance to set rigid targets, with little thought given to sustainable reform. Now China, no longer a command economy, is at a critical transitional stage. This year, the Party has a chance to try harder.
The 12th five-year plan due on October 15 is likely to focus on uncontroversial issues like social welfare, urbanization and the environment. All worthy causes. But China is already driving hard toward them. Instead, are five suggestions for new goals that might work wonders.
1. Stop targeting GDP growth
Setting a growth target for the five years sends the wrong message. Over-achieving local governments merely use it as an excuse to beat the target at any environmental or social cost. China also beats its own GDP targets as a matter of routine, which makes them pointless. Growth of 11.1 percent from 2006 to 2010 smashed the official goal of 7.5 percent.
China’s export growth moderated a bit in September, but pressure to revalue its currency probably won’t. The quarterly trade surplus was at its highest since 2008, and China’s massive pile of foreign exchange hit $2.6 trillion. These numbers set China up for some tough questions at November’s G20.
Record monthly imports show that China is growing strongly. The total value of imports gained 16 percent on a month-on-month basis. Higher commodity prices helped. But imports for products destined for processing and re-export grew at a slower pace than total imports, according to Chinese Customs data, supporting the theory that domestic demand is starting to drive the economy.
China is no longer blindly in love with new stocks, as seen in this week’s flop of Ningbo Port. But other markets have caught the fever. Four Chinese companies rose on average around 50 percent on their debut in New York and Hong Kong in the past week. Cash-rich global investors are hungry for China’s high rates of growth. A flood of new supply may test their appetite.
The excitement over the latest crop of overseas-listed China stocks is reminiscent of recent years’ booms on the Shanghai and Shenzhen markets. Children’s clothing maker Boshiwa <1698.HK>, and restaurant chain Country Style Cooking , rose by 41 percent and 47 percent respectively on their debuts. On domestic markets, the story is very different. China’s third-largest port operator fell 4 percent on September 28, its first day of trading.
Bill Gates and Warren Buffett have star power, but even they may struggle to persuade China’s billionaires that celebrity philanthropy is a must. Chinese billionaires feel insecure about their wealth, and trustworthy charities are lacking. Still, as China’s wealth gap widens, the super-rich should start thinking up ways to look more generous.
The Middle Kingdom is home to more dollar billionaires than anywhere except the United States, according to Forbes. But charitable giving accounted for only 0.1 percent of China’s GDP in 2009, versus 2 percent in the United States. Buffett and Gates are set to hold a banquet in China as part of their philanthropy-themed world tour, but some local moguls have reportedly kept a wary distance.
A top think tank has advised Washington to declare a currency war on China. The proposal from the Peterson Institute to force up the value of the yuan sounds fascinating, but a direct attack may be hard to pull off in practice. Beijing is likely to respond better to multi-lateral persuasion.
Peterson has called for a U.S. raid on the forwards market for the yuan, which it believes has to rise at least 25 percent against the dollar. The timing is good. U.S. lawmakers are already threatening to slap tariffs on Chinese imports, and the 1.5 percent rise of the yuan in the past two weeks hardly looks enough.
By John Foley and Wei Gu
China’s plans to make its currency global could change the world — if they get off the ground. More international use of the yuan might increase China’s trade clout, unseat the mighty U.S. dollar and make a lot of financiers very rich in the process. But it can be hard to separate the facts from the fable. Here are some questions answered.
Why are people talking about an international yuan?
China is the world’s second-biggest economy. But its currency doesn’t nearly match its size. For most international dealings, China relies on the dollar, which leaves it beholden to the United States. Beijing wants more influence on the global stage, so it has been taking baby-steps to turn the yuan into an internationally used currency.
Thirty years ago, a small fishing village called Shenzhen led China’s economic miracle. Now, it has a more challenging mission. President Hu Jintao said Shenzhen should test political reforms. Although changes may be disruptive in the short run, more checks and balances and rule of law are key for sustainable growth.
China’s authoritarian system has shown its merit during the global financial crisis. When Western banks stopped lending, China’s state-owned banks kept pumping credit into the system. The centrally planned economy was also good at funnelling cheap capital and resources to industries. That has helped China to continue its transition from a poor rural economy into a global manufacturing powerhouse.
China’s strategy to diversify away from dollars gets ever more complicated. It has been buying more Asian debt to move some of its $2.4 trillion reserves away from the greenback. But this vote of confidence might not be welcome to politicians in Japan and Korea, who already worry about their currencies being too pricy. Given the risk of financial losses or, worse, political friction, sticking to the dollar looks the lesser evil.
Chinese purchases of Asian debt have paid off so far. The yen has risen more than 8 percent this year so far, and 11 percent since the bulk of Chinese buying was done in May and June. The won has appreciated close to 7 percent since its April low. Korean bonds yield more than both U.S. and Chinese bonds. Japanese 10-year bond yields are less than half of what their U.S. counterparts offer, but currency appreciation offers some consolation.
Beijing wants a stable yuan and a bigger international role for the Chinese currency. It will be difficult to have both. Relaxing the use of the yuan outside China will cause more capital to flow into the country, making it harder to control the exchange rate. So far, Beijing has managed to limit the yuan’s volatility. That may not last forever.
China is relaxing its capital controls by opening a small hole in the wall to Hong Kong. Since mid-July, it has allowed Hong Kong-based companies to keep yuan-denominated deposit accounts, transfer funds freely in the region and even remit funds back to China. Meanwhile, Hong Kong banks and insurance firms can now sell yuan-denominated structured products, which provide higher returns than basic deposits.