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Chinese Premier Wen Jiabao recently revealed the numbers behind China’s twelfth five year plan. In its most recent incantation, the plan shifts from a target of 8% annual growth to a more reasonable 7%. The 7% number is focused on stimulating domestic consumption, raising the standard of living, increasing environmental awareness and shifting away from an export driven economy. Let’s take a look at some of the things Premier Wen said.

Quality of Growth

Premier Wen Jiabao focused on changing the culture of growth in China from purely growth for growth to a more sustainable structure that would yield benefits for China’s people. He said although growth is booming, he sees disparity between that growth and the impact on the common citizen. Wen said:

In some places, I have seen, urban construction is very fast, but as you walk along, you see shabby rural streets and housing, and some farmers are still hard pressed to pay schools the 100-yuan heating fees for their kids. Therefore, I tell local officials, wouldn't it be better if we construct fewer high buildings and spend the funds for expanding the urban scale on raising living standards?

This represents a change in focus for an economy that has been trying to build as much as possible and ask questions later. The disconnect between the national prosperity in terms of GDP and the actual increase in standard of living for the Chinese people has been drastic. Per capita income is still a paltry 4500 USD, lower than any developed nation. And prices are beginning to get out of hand. This combination has motivated the government to move towards a more citizen-centric approach to growth. With this new approach comes new criteria for evaluating the work of government officials. Wen said:

We should change the criteria for evaluating officials' work. The supreme criterion for assessing their performance is whether the people feel happy and satisfied, rather than skyscrapers.

This seems to be an ambiguous statement designed to please people without providing a road map to the destination. How exactly would he measure happiness and satisfaction? That would require a lot more input by the common man than is currently acceptable in this country. If he really wants to improve the lot of his citizens, he needs to increase domestic consumption.

Domestic Consumption

On this point, Wen seemed to be more on board than I’ve previously heard him. He spoke about increasing consumption to better the lives of the commoners. He said:

We want to put the emphasis of our work on the quality and the benefits of economic growth. We want the fruits of development to benefit the people… The purpose of our economic development is to meet the people's growing material and cultural needs, and make the lives of commoners better and better.

This is a great move if you are a citizen of China. Although the per capita income is still very low, there have been some improvements made throughout the years. For example, health care spending is now carried by individuals at a rate of only 40%, as opposed to 66% in 2001. Beijing wants this below 30% by 2015. In addition, the government would like to increase the life expectancy from 73 to 74.5 and do well in terms of medical rankings.

Despite this focus, China still has room to consume more. The depressed state of the Yuan stifles China's ability to import and as a result household spending accounts for only 35% of the economy. Compare this with the great consumers in America, who are at 71%, and even India at 57%. This is something that needs to be changed in order for China to actually pursue this new plan. Without domestic consumption and a shift away from export centric industry, there is no hope for higher quality growth in the near future.

Environment

The environmental gaffes in China’s history are many. From poisoning children with lead to killing thousands of fish by leaking acid into a river, the Chinese have usually navigated with a sort of sordid indifference around talks of environmental responsibility. Apparently that too, has changed. Wen stated that:

We absolutely cannot again sacrifice the environment as the cost for high-speed growth, to have blind development, and in that way to create overcapacity and put greater pressure on the environment and resources. That economic development is unsustainable.

Again, the theme of unsustainable growth comes up as a pressure point to action. Whatever the motivation, everyone can certainly agree with this statement. Cooperation on a variety of tasks including greenhouse gases and carbon would be beneficial to everyone.

Appreciation of the Yuan

This is one area where I expected Wen to tread softly or not at all. Despite the boyish taunts from Geithner over the last few years, Wen has been steadfast in his opposition to any hastened appreciation of the Yuan. He mentioned price increases as a catalyst for social instability:

Rapid price rises have affected the lives of the people and even social stability.

However, when given the suggestion that an appreciation of the Yuan would help control these price increases, he countered that such a move:

Would bankrupt or put out of business many processing enterprises, cause foreign trading companies to lose orders to other countries.

So, Wen continues to fight the good fight against the quick appreciation of the Yuan. One thing is certain: That it will appreciate significantly. The question in the equation continues to be Wen (pun intended). Regardless of all this, the Yuan is trading near its 17 year high on this news.

Conclusions

Many analysts are trying to make the case that this is a harbinger of doom for the developed world’s stock indexes (here is one example). Their case is simple; since much of the world’s growth is now derived from Asia, this pressure on the hand brake by the Chinese government will bring down profits for companies expanding there, and therefore hurt stock performance. This is a good story, and if China were actually intending to restrict growth using any means necessary to not exceed a 7% target, then it might actually have legs. However, China is not suddenly going to slow its growth. Just take a look at its history.

China is a massive, booming economy. Its previous targets of 8% have been smashed and exceeded every year (usually resulting in celebration and accolade), most recently settling on 10.3% growth for 2010. So, if the government lowers the target in its five year plan, will it actually slow growth to that amount? Does an avalanche suddenly shift course? No and no. The culture of rapid growth is still embedded in local governments and officials. Many forecasts for the year have already been released with double digit targets, laying the foundation for confrontation between municipalities and the new five year plan. Right now, the statement is only just that, a collection of words that can be taken back or altered or ignored.

What does this mean for U.S. investors? It means, as usual, that investors should keep an eye on the things that are actually changing in China, without doing anything drastic. There is no need to withdraw all your capital from the country, as there are still incredible opportunities in China (the cases for which I've made here, here, here and here).

The things to focus on now, as I've said in my previous articles, are not stocks that benefit from exports but stocks that benefit from an appreciating Yuan and an increase in domestic consumption. I've laid out some of the roads that China will take here, and if you want to invest in China I would urge you to read it. Growth and China will continue to be coupled over the next decade, and anyone not on board in terms of investments will have their returns suffer.

The impact of a shift in the focus of China's five year plan will take time and effort to bring to fruition. Does the Chinese government have the salt to accomplish such a feat? Alistair Thornton, China analyst for HIS Global Insight, recently said:

The roadmap is clear, but the extent to which the political will and power is sufficient remains to be seen.

I couldn’t agree more. Let’s not jump to conclusions regarding this news. The growth opportunities are still solid in China and this will not ruin those opportunities in the near future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: China's New Five Year Plan: Why It Matters