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China’s 12th Five Year Plan. A Necessary Revisiting. Part I.

Posted in China Business

Co-blogger Steve Dickinson yesterday spoke at the Chengdu AmCham on China’s 12th Five Year Plan and he will be speaking on that again on April 14 at the Swedish Chamber in Beijing. Though Steve has already written a few posts on here regarding the plan, this one is an important update because it discusses how the plan has evolved such that it now differs markedly from even its most recent drafts.

As I have mentioned previously, China tends to very much follow its five year plans and so they can make an excellent blueprint for businesses located in or doing business with China.

This post will be in two parts, with Part II to come out tomorrow. Today’s post focuses on the guidance given for the Plan. Tomorrow’s post will focus on the plan as actually adopted. 

By:  Steve Dickinson

Guidance for China’s Twelfth Five Year Plan was adopted by the CPC [Communist Party of China] 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 been published in China 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 the year 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. The 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

1. “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)

2. 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 only five years. This is a bold goal.

The focus of transformation is as follows:

1. From export led consumption to domestic led consumption.

2. From excessive reliance on exports to balance between export, import and domestic consumption.

3. From reliance on foreign technology to reliance on domestic innovation.

4. 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. To address the ten challenges, and in accordance with the theoretical approach, the CPC proposes that the 12th Five Year Plan focus on ten major areas, as follows:

1. Expand domestic consumption while maintaining stable economic development.

a. Unleash domestic consumption. This will be done through the measures at item seven below.

b. Coordinate consumption, investment and export to create a balanced economy.

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

a. Modernize agriculture through mechanization and measures that allow larger farms.

b. Invest in agriculture infrastructure, especially in waterworks.

c. Create non-agricultural rural employment.

d. Improve legal and financial development mechanisms.

e. Improve agricultural service business in areas such as wholesaling, warehousing, processing, transportation and marketing.

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

a. Develop service trade. Services currently contribute to less than 40% of GDP. The goal is to         raise this number to 70% or higher.

b. Develop modern energy and integrated logistics.

c. Develop marine resources.

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

a. Combat regional disparities.

b. 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 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 of use were to continue, China would 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:

a. China will seed to become a domestic innovator in all areas of current modern technology, with an emphasis on practical industrial applications.

b. 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:

1. 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.

2. Currently, China’s colleges produce far more graduates than its 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 of China’s goals and role within the world economy.

9. Increase the pace of reform of the economy.

            a. Financial market reform, especially the RMB.

            b. 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.

            a. Shift from export only to a balance between export and import.

            b. Shift from inbound investment only to a balance between inbound and outbound investment.               China will continue with its “going out” policy.

            c. Actively participate in international economic governance.

  • http://www.iqidu.com Mao Ruiqi

    Boy, am i confused. What do the English words “unleashing domestic consumption” mean with respect to inflation, i.e. nearly unlimited buyers chasing extremely limited goods. or to auto tradeoffs, i.e. lost farmlands to parking lots and malls, or to disparities between the urban affluent and the poverty stricken peasants?

  • vj

    This is a very good summary. Thanks for it.
    I am comparing it to the local economic development plan of the County I live in near Orlando, Florida, USA.
    I might suggest one sector is to provide retirement enclaves for people from other countries, since your costs are lower. This is done in various Latin American countries like Costa Rica. A major problem is that foreigners do not believe they can rely on the legal systems of China. Another issue is the winner take all approach of Chinese firms documented in various movies in the US – a key one is a movie on an auto manufacturer who tried to partner with Chinese firms and they constantly changed their mind. Another issue is the tendency of Chinese firms to provide poor quality products or use dangerous components, chemicals etc not acceptable to the US health authorities. An example is the “Chinese drywall” industry that provide mold producing drywall, causing numerous home owners to lose their homes because they were not livable. But, China seems to implement initiatives when they have priority, and I wish them luck on the new initiatives to improve conditions for citizens.

  • http://www.shigroupchina.com Jim

    I just went to the Swedish Chamber meeting that Steve spoke at, and it was great., Two cheers for Harris & Moure law firm for their understanding of the political economic situation on the ground here,

  • Ari

    Great review. I am looking forward to tomorrow’s post.

  • Nate

    So it would be reasonable to expect the RMB to rise substantially against the US Dollar in the next five years? If things go as planned.