China’s Five-Year Plan and Global Interest Rates

CAMBRIDGE – China’s new five-year plan will have important implications for the global economy. Its key feature is to shift official policy from maximizing GDP growth toward raising consumption and average workers’ standard of living. Although this change is driven by Chinese domestic considerations, it could have a significant impact on global capital flows and interest rates.

China’s high rate of GDP growth over the past decade has, of course, raised the real incomes of hundreds of millions of Chinese, particularly those living in or near urban areas. And the funds that urban workers send to relatives who remain in the agricultural sector have helped to raise their standard of living as well.

But real wages and consumption have grown more slowly than China’s total GDP. Much of the income from GDP growth went to large state-owned enterprises, which strengthened their monopoly power. And a substantial share of China’s output goes abroad, with exports exceeding imports by enough to create a current-account surplus of more than $350 billion over the past year.

China now plans to raise the relative growth rate of real wages and to encourage increased consumer spending. There will also be more emphasis on expanding service industries and less on manufacturing. State-owned enterprises will be forced to distribute more of their profits. The rising value of the renminbi will induce Chinese manufacturers to shift their emphasis from export markets to production for markets at home. And the government will spend more on low-income housing and to expand health-care services.