Pressing concerns

A great deal of recent speculation in China on the imminent new plan has focused on the need for it to seriously address income inequality (between highest to lowest segments; across regions; and between urban and rural areas) and uneven development, namely, wages that have grown slower than GDP, on the one hand, and a slower percentage rise in citizens' savings rate compared to inflation (meaning that even though people save, they are still falling behind in terms of wealth accumulation), on the other.

This particular issue was highlighted anew in October: while the Fifth Plenary was poring over the outline for the new plan, the Consumer Price Index in China increased to 4.4 percent, the highest level in two years (see Chart 1). Food prices soared more than 10 percent, making curbing inflation now likely the government's top priority.

China's official Purchasing Managers Index (PMI) also continued to strengthen in October, rising to a six-month high of 54.7 (from 53.8 in September) (see Chart 2). The finer details of October's PMI survey results seemed to indicate that growth was being driven mostly by domestic as opposed to external demand: the sub-index for new orders increased to 58.2, while that for new export orders declined to 52.6. Yet the higher input prices and resulting cost pressures are likely to impact China's PMI in the coming months. Indeed, China's pace of economic growth has gradually decreased throughout 2010, and growth for the fourth quarter this year is estimated to reach around 9.0 percent (see Chart 3). With a slowing economy, rising inflation, and decreased external demand, China has now attained a new turning point where it can either continue in the (successful though lopsided) investment- and trade-centered economic growth of before, or embark on "intensive" economic growth fundamentally dependent on domestic consumption and technology. The lever of this second option - China's turn inwards – will hopefully be the 12th Five-Year Plan.