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China’s 12th Five Year Plan: A Preliminary Look

Posted in China Business

Co-blogger Steve Dickinson has been speaking of late at various embassies and chambers of commerce in Beijing regarding China’s Twelfth Five Year Plan. Steve will be speaking on this again at the Swedish Chamber in April. The following is the outline Steve has been using.

A major task for this year is the adoption of a 12th Five Year Plan by the National People’s Congress. This plan will be adopted during the March meetings of the National People’s Congress and the CPC. Guidance for the plan was adopted by the CPC last October in two critical documents: 

The Opinion of the CPC Central Committee on Establishing the 12th Five Year Plan (中共中央关于制定国民经济和社会发展第十二个五年规划的建议) (the Opinion) adopted on October 18, 2010

Explanation of the Opinion (央关于制定国民经济和社会发展第十二个五年规划的建议的说明) authored by Wen Jiabao and presented to the CPC Central Committee on October 15, 2010.

This preliminary review is based on those documents and on government and research institutes that have put out papers in response to those documents.

I. China’s Ten Major Challenges

The goal of the Chinese regulators is for China to become a moderately prosperous country by 2020. The current five year period will be critical in meeting that goal. China has recently reached a level where its per capita GDP equals $US4,000. Its goal is to achieve a $US10,000 per capita GDP by the year 2020. This is a critical transition. It is generally believed to be relatively easy for a country to achieve the $4,000 number. It is common, however, for countries to stall out in GDP growth and never achieve the $10,000 goal. 

The goal of the 12th Five Year plan is to prevent China’s growth from stalling. In the Opinion, the CPC identifies 10 factors that threaten the continued development of the Chinese economy:

  1. Resource constraints: energy and raw materials.
  2. Mismatch in investment and imbalance in consumption.
  3. Income disparity.
  4. Weakness in capacity for domestic innovation.
  5. Production structure is not rational: too much heavy industry, not enough service.
  6. Agriculture foundation is thin and weak.
  7. Urban/rural development is not coordinated.
  8. Employment system is imbalanced.
  9. Social contradictions are progressively more apparent.
  10. Obstacles to scientific development continue to exist and are difficult to remove.

II. The Theoretical Solution

Before discussing the concrete outline of the plan, the Party sets out the theoretical approach that will serve as the guide:

A. The Main Theme: Scientific Development

  • “During the period of the 12th Five Year Plan, economic development remains the key to resolution of all problems.” (Wen Jiabao, quoting from the Opinion)
  • Development must be “scientific,” practical (unconstrained by ideology), human centered, and sustainable.

B. The Main Line: “China must rapidly engage in a complete transformation of its form of economic development.”

It cannot be stressed sufficiently how radical is the proposed remedy. The idea is not to refine the current system, but to completely transform the current system in the brief period of five years. This is a bold goal.

The focus of transformation is as follows:

1. From export led consumption to domestic led consumption.

  • From excessive reliance on exports to balance between export, import and domestic consumption.
  • From reliance on foreign technology to reliance on domestic innovation.
  • From reliance on “old” energy and materials and industries to creation of a low-carbon /new-materials based economy.

III. Ten Point Outline of the 12th Five Year Plan

A. In order to address the 10 challenges, and in accordance with the theoretical approach, the CPC proposes that the 12th Five Year Plan focus on 10 major areas, as follows:

1. Expand domestic consumption while maintaining stable economic development.

  • Unleash domestic consumption This will be done through the measures at item seven below.
  • Coordinate consumption, investment and export to create a balanced economy.

2. Modernize agriculture to create the new socialist rural village. .

  • Modernize agriculture through mechanization and measures that allow larger farms.
  • Invest in agriculture infrastructure, especially in waterworks.
  • Create non-agricultural rural employment.
  • Improve legal and financial development mechanisms.
  • Improve agricultural service business in areas such as wholesaling, warehousing, processing, transportation and marketing.

3. Develop a modern, balanced industrial and trade structure.

  • Develop service trade. Services currently contribute to less than 40% of GDP. The goal is to raise this number to 70% or higher.
  • Develop modern energy and integrated logistics.
  • Develop marine resources.

4. Advance the integration between regions and encourage stable urbanization.

  • Combat regional disparities.
  • Eliminate the urban/rural distinction. Cities at the second tier and lower must accept rural migrants. The goal is to provide for industrial/service employment for agricultural laborers in areas close to their current residence. This will be done to avoid a mass migration of rural residents into the tier one cities.

5. Promote energy saving and environmental protection.

Currently, for every 1% increase in GDP, China’s energy use increases by 1% or more. If this rate continues, China will need to increase its energy consumption by 2.5 times to achieve its 2020 economic goal. To put this into perspective, this would mean increasing the current consumption of coal from the current 3.6 billion tons per year to an astronomical 7.9 billion tons a year. No one in China thinks this can be done. One major way to reduce the amount of energy required for the Chinese economy is to implement energy saving practices throughout the economy. A second way to reduce is to shift from hydrocarbon based energy to alternative energy sources. The new plan advocates an all out program in this area.

6. Create an innovation driven society by encouraging education and training of the workforce.

The plan seeks to shift China from its role as the factory of the world to a new role as a technological innovator for the world. There are two components to this approach:

  • China will need to become a domestic innovator in all areas of current modern technology, with an emphasis on practical industrial applications.
  • Where China is not capable of domestic innovation, China will continue to import technology from advanced economies. However, China will seek to actively domesticate that technology through a program of “assimilate and re-invent.” The recent program for production in engines for high speed rail is offered as an example of the “assimilate and re-invent” approach.

7. Establish a comprehensive public social welfare system.

In order to meet the goal of unleashing domestic consumption, China has to move to a policy that puts more disposable income in the hands of its citizens. The plan proposed the following approach:

a. Labor and employment

China must provide jobs for a growing workforce. There are two key areas:

– It is estimated that over the next ten years, 200 million persons will be shifted from agricultural labor to urban industrial/service labor. Jobs for these persons consistent with their training must be provided.

– Currently, China’s colleges produce far more graduates than the economy can absorb. Entry level jobs for college and technical school graduates must be provided. Education must also be adjusted to accord with the realities of the job market.

b. Wages

Chinese wage are abnormally low. Most planners are pushing for tripling of the average wage for factory workers during this 5 year plan.

c. Provide comprehensive government benefit programs, especially retirement pensions.

d. Provide government funded medical services with comprehensive basic coverage by the end of 2011.

e. Maintain active population control.

It is interesting to note that two major issues are not effectively considered in the plan: the first is the cost of housing and the second is the cost of high school and college education. Though there has been some discussion of constructing low income housing, the measures proposed will do little or nothing to address the problem of affordable housing in China’s major cities.

8. Encourage cultural production in order to increase China’s “soft power”.

China will seek to make its case for the world to avoid misunderstanding China’s goals and its role within the world economy.

9. Increase the pace of reform of the economy.

  • Financial market reform, especially the RMB.
  • Energy price reform and price reform of other economic inputs (raw materials).

10. Continue with liberalization and “opening-up” to the outside, but on a new track.

  • Shift from export only to a balance between export and import.
  • Shift from inbound investment only to a balance between inbound and outbound investment. China will continue with its “going out” policy.
  • Actively participate in international economic governance.

UPDATE: The Wall Street Journal Real Time Blog, in its post, “National People’s Congress: Not Just a Rubber Stamp Session” and Christina Larson of Foreign Policy in her post, ”What will be in China’s next Five Year Plan?” both cite to our post and then do an excellent job providing additional analysis of what we should be expecting from the Plan.

  • Bjorn Gunnglarson

    Why do I find it amusing that an American lawyer is talking about China’s next five year plan, at the Swedish Chamber in Beijing. Surely a mishmash of everyone in the wrong musical chair?

  • Stan

    @ Bjorn……Bob Dylan once sang “You don’t need a weatherman to know which way the wind blows”…other than reading Dan’s past posts perhaps those words will ease your discomfort.

  • Andrew H.

    Great report. Great analysis. Steve speaks and the mainstream media listens.

  • dawei

    Thanks for the useful look-ahead summary as we look down another wide open five years. Consider the China we see today against our guesses from the spring of 2006 — truly extrodinary, no?
    I do believe that the point about growth in energy use, “Currently, for every 1% increase in GDP, China’s energy use increases by 1% or more” could be refined. This elasticity of energy use for economic growth is basically less than 1 in China over the reform period, and reducing so-called “energy intensity” is the actually the cornerstone of recent Chinese energy policy. The annual decline in energy intensity over the past decade has been in the ballpark of 4% (that is, the energy required to produce one unit of economic output), and the total decline for the 11FYG period looks to have been around 19.1%, just shy of the 20% reduction goal.
    Of course, economy-wide energy intensity is certainly among the more aggregate figures that one can try to track (relying, in part, on varying conventions and assumptions about more esoteric indicators such as the average heat content of a standard measure of coal, or, say, one’s philosophy about how to relate the “thermal efficiency” of a hydropower station, to a wind turbine, to a natural gas turbine….. the breadth of the measure’s contained variables is perhaps eclipsed only by the newly-favoured metic of economy-wide carbon intensity…), so through its use it be can be quite reasonable to look at the same reality and draw somewhat different conclusions.

  • dan berg

    I suggest Steve use the PREVIOUS 5 year plan – see if the Swedes even notice; it too would shift the economy from exports to consumption etc; in fact, they have been saying this since at least Dec. 2004.

  • Croy

    The plan looks great just like most government development plans. Can it be implemented though? Whilst plans are necessary they are usually top-down and with little consideration of the people they are aimed at. If one were to visit a Chinese village and ask the people whether the last plan worked you will find whose lives are not improving, who do not have opportunities, who are being exploited by some local level officials. I hope the plan works, but deeper structural changes are required and this will take more than five years.

  • Dr.A.Jagadeesh

    China has ambitious plans in the field of Energy and Environment in its 12th Five Year Plan. Already China is leading in Solar and Wind Energy not to speak of Micro Hydro.
    Dr.A.Jagadeesh Nellore(AP),India

  • Twofish

    Berg: It too would shift the economy from exports to consumption etc; in fact, they have been saying this since at least Dec. 2004.
    Yup, and it takes some time to change things. You are seeing some shifts from exports to consumption. It just takes a while to change things.
    The Five Year Plans are wish lists, but figure out what the official wish list is important. For example, the five year plan has an “environmental wish.” Now it will turn out that they will have a huge number of battles to do something with that wish, but you’ll get more done than if you didn’t have that wish at all.

  • Nick P.

    The plan is flawless, and pretty consistent with western economic planning. The implementation of any single point is not detailed enough to be able to tell whether it will be accomplished.
    The fact that it follows western style economic planning is a sure sign that it will fail miserably. Let’s say it’s comparable to their Stimulus package… which has brought about severe inflation… let’s say it was a better implementation than the US’s stimulus, as it was distributed to the real economy; but predominantly to the top level companies who would then trickle it down.
    The principal problem is that if distribution method, and the lack of relationship of what’s distributed and any new production. In other words, the disbursement of more cash into anybody pocket without there being a comparable level of production, will naturally produce inflation.
    Part of this is cultural. The lower rank and file are still relatively strongly ruled by the folks that were born in the fifties and sixties. They pretty much impress the savings to buy homes for the family. So, even an adult couple will not exercise complete autonomy in how the spend. To the extent they do this, will affect the degree of inflation. Of course, there will always be pressure on housing. This is sacred, and people are willing to pay more just to get something.
    The education is another factor, and there’s little chance there will be much changes in education which would eventually reflect in increased creativity and productivity for the population. Poor quality still causes people to shy away from buying unless absolutely necessary.
    China has the ability and resources to do what it plans; but in the present atmosphere, I can’t bet it will do much more than maybe a 20% of the plan in the next five year plan.

  • White Camry

    Any new Five-Year Economic Plan will be subject to the Ten-Year Olympic Curse. Whenever a one-party state hosts an Olympics, ten years later that state circles the drain if it’s not already down it. To wit:
    1936: Berlin Olympics / Garmisch-Partenkirchen Winter Olympics
    1946: Allied Occupation
    1980: Moscow Olympics
    1990: Collapse of Communism
    1984: Sarajevo Winter Olympics
    1994: Yugoslav Civil War
    2008: Beijing Olympics:
    2018: ?
    Remember, you heard it here first.