By John Ross    Source: China.org.cn    Published: 2016-3-15

Same goal [By Gu Peili / China.org.cn]

China`s 13th Five Year Plan, running from 2016 to 2020, presented to this year`s National People`s Congress session, sets the framework not only for China`s domestic development, but for other countries` economic interaction with it. Consequently, it is important that other states accurately judge the main effects that China`s "reform and opening up" process will have on them. The key trends confirm China will continue to show the greatest prospects for international cooperation with any major economy.

The first key point is that the 6.5 percent minimum annual GDP growth target over the Plan`s entire duration is more important for China and other countries than 2016`s individual 6.5 to 7.0 percent target. Some commentators have suggested that while China may achieve a 6.5 percent growth target in 2016, this will be followed by a significant slowdown - to 5.0 percent or below by 2020. If this occurs, China would be drifting towards, in the worst case scenario, the "middle income trap." The Plan`s arithmetic makes clear that China is not prepared to let this happen, while the key features of China`s economic structure show there is no reason for it to do so.

The decisive target of the 13th Five Year Plan is to achieve a "moderately prosperous" society - in numbers, this means doubling China`s GDP between 2010 and 2020. Growth in the first half of this decade averaged 7.8 percent. Therefore, to achieve the decade`s target average annual growth throughout 2016-2020, the rate must equal at least 6.5 percent. As 2016`s target is 6.5 to 7.0 percent, this means no significant slowing will be accepted in the Plan`s later years.

More important than verbal commitment is that China`s fundamental economic parameters show this target can be achieved - China`s fixed investment is over 40 percent of GDP, more than double the U.S., while statistics confirm China`s efficiency of investment in generating growth is higher than that of the U.S.

This means China will maintain its present position as the world economy`s strongest development point throughout the Plan. U.S. GDP growth in 2015 was 2.4 percent, in line with U.S. average annual growth for the last 20 years. Even assuming U.S. growth does not slow further (it has been decelerating for several decades), in the next five years, China`s economy will expand by 37 percent compared to the U.S.`s 13 percent.

The second key impact for other countries is created by the combination of China`s rapid growth, with China being a more "open" trade economy than the U.S. The latest internationally comparable data shows that trade constituted 40.1 percent of China`s GDP compared to 30.1 percent for the U.S. China`s greater openness means its growth generates a proportionately greater increase in international trade than equivalent U.S. growth.

In order to accurately grasp these trade trends, it is important to correct any misunderstanding caused by the fact that the dollar value of all major economies` trade is currently declining due to the global fall in commodity prices - the latest IMF data shows trade declining $3.5 trillion, or 11 percent, year on year. However, China`s world trade share has expanded as it suffered less from this than other major economies.

As Figure 1 shows, the latest IMF data shows China`s share of world trade has reached its highest ever level. China is continuing to outcompete and out trade other economies - consolidating its position as the world`s largest goods trading nation.

Figure 1

If China`s global position in growth and trade continue well-established trends, there are new key factors which will affect other countries as China is making the transition from a "medium income" economy, by World Bank standards, towards a "high income" economy. Some, such as China becoming the world leader in renewable energy, will have a major indirect effect on other countries via their effects in fighting climate change. Two direct economic processes particularly affect other countries.

First, China is no exception to the rule that all major economies were internationalized first via trade and only later via foreign direct investment (FDI). But China has unparalleled financial resources to develop FDI. China`s $3.2 trillion foreign exchange reserves are the world`s highest. China`s domestic savings, the raw material for its financial system, have now far overtaken the U.S. - World Bank and U.S. data show China`s 2014 savings at $5.2 trillion compared to the U.S.`s $3.3 trillion.

Globally unmatched financial firepower allowed China to rapidly ramp up its annual outward FDI flow from under $20 billion in 2006 to $118 billion in 2015, to be the driving force behind the "Belt and Road" initiative, and to lead multilateral initiatives such as the Asian Infrastructure Investment Bank and New Development Bank (BRICS bank). Simultaneously, the Chinese domestic market`s rapid expansion attracted $119 billion inward FDI in 2015, with 61 percent going into services. China will therefore play an increasingly large role in global bilateral and multilateral FDI.

A second decisive trend is China`s technological upgrading and the priority given to developing innovative capacity. It is a romantic myth that innovation is due to creative culture or "garage start-ups" - the latter failing to mention what such garages are connected to! As Zoltan Acs noted in his classic study of U.S. innovation, "When one asked the question, `What makes Silicon Valley unique` the discussion usually comes back to one great institution - Stanford University." "It is conventional wisdom that Silicon Valley and Route 128 owe their status as centers of commercial innovation and entrepreneurship to their proximity to Stanford and MIT [Massachusetts Institute of Technology]."

The Five Year Plan will raise China`s R&D spending to 2.5 percent of GDP by 2020 - almost equalling the U.S.`s current R&D spending as a proportion of GDP. It is this huge resource allocation that powers China`s innovative ability. It ensures that while China will switch out the industries fundamentally dependent on very low wages it will increasingly gain competiveness in medium technology and parts of high technology industries - crucially affecting other countries. China will increasingly export higher value products while importing products dependent on very low wages. Simultaneously, consolidation of China`s lead in cost innovation, ability to achieve competitive prices by technological and managerial innovation, means global companies will increasingly have to locate research facilities in China.

The author is a Senior Fellow at Chongyang Institute for Financial Studies, Renmin University of China.