Yesterday, co-blogger Steve Dickinson wrote a post on the lead up to China’s 12th Five Year Plan. Today’s post is another one by Steve on China’s 12th Five Year Plan, but this one focuses on the plan as actually adopted, which as we will see, is actually surprisingly different from what was discussed.
IV. The 12th Five Year Plan as Adopted
On March 16, 2011, the People’s Congress made public the Outline of the 12th Five Year Plan 中华人民共和国国民经济和社会发展第十二个五年规划纲要 (The Plan) As adopted, the Plan entirely abandons the Opinion [see yesterday’s post] in favor of a infrastructure/industry/export led growth model.
The numerical targets contained in The Plan illustrate this very clearly:
A. Numerical Targets for the Five Year Period Ending in 2015
2005 2010 2015 (Plan)
GDP(RMB) 18.5 trillion 39.8 trillion 55.8 trillion
Service as a % of GDP 40.5 43 47
R&D as a % of GDP 1.3 1.75 2.2
Urban Income(RMB) 10493 19109 26810
Rural Income (RMB) 3255 5919 8310
Urbanization (%) 47.5 51.5
Patents per 104 Persons 1.7 3.3
New Jobs 51,000,000 45,000,000
Strategic Industry as % of GDP 8.0 %
Note that NONE of the numerical targets set forth above meet the goals of the Opinion.
B. The basic format of The Plan
1. The Plan follows the basic outline of the Opinion, with the following critical changes:
- The discussion of “unleashing domestic consumption” is abandoned.
- The domestic consumption discussion is replaced with a proposal for a massive domestic infrastructure program.
- Social management and control is given increased prominence.
- Social measures such as increase in wages, increase in service sector, increase in education and R&D are all reduced to incremental increases from previous levels, mostly in line with projected inflation. No major changes are proposed.
2. The structure of The Plan with highlights is as follows:
Section I: Policy Guidance: Scientific Development
Section II. Reform of Agriculture
Section III: Promote Domestic Industry
Section IV: Promote Service Industry
Section V: Encourage Undeveloped Regions and Promote Urbanization
Section VI: Green Development: Global Warming, Energy and Resource Conservation and Environmental Protection
Section VII: Improve Domestic Innovation, Education and Workforce Training
Section VIII: Improve the Livelihood of the People: Wages, Medical and Pension
Section IX: Social Management and Control
Section X: Cultural Development and Soft Power
Section XI: Improvement of the Economic System
Section XII Continue Opening to the Outside World
Section XIII: Improve the Operations of Government, including Reduction in Corruption
Section XIV: Unify the Country
Section XV: Advance Military Power
Section XVI: Develop Overall Blueprint of Economic and Social Development
C. The Core of the Plan is a Massive Infrastructure Program.
The only portion of The Plan with any real interest is Section III. This section outlines a massive set of plans to transform China’s infrastructure and manufacturing base. Highlights are as follows:
Article 9: New manufacturing should be located where raw materials and energy resources are already in place:
- If the material/energy inputs are domestic, manufacturing should be located in the Central/Western regions.
- Where imports are critical, location should be along the coast.
Fragmentation of domestic manufacture should be reduced through M&A, particularly in the following areas: automobiles, steel, cement, equipment manufacturing, aluminum, rare earths, IT and drugs. The goal is to create national champions that can compete in the international economy (i.e. export oriented).
Article 10: Promote Strategic New Industries
The following strategic industries will be promoted:
- Energy saving and environmental protection (clean energy technology)
- Next generation IT
- Bio-technology (pharma and vaccine manufacturers)
- High end equipment (airplanes, satellites, high speed rail, power plants, manufacturing technology)
- New energy (nuclear, wind, solar)
- New materials (rare earths, nano technology, carbon fiber and related)
- New energy autos and related (electric and hybrid cars, batteries)
Promotion will be through direct grants, loans, and various tax incentives.
Note again: this is ALL export oriented.
Article 11: Energy
- Complete development of major fields
- Start work in Xinjiang
- Build electric generation sites at coal fields
2. Crude Oil
- Develop domestic oil and natural gas fields on land
- Push out to deep water
- Develop coal bed methane
- Concentrate on coastal regions
- 40 GW new capacity
- Over 50 new reactors
- Cost at over $150 billion
4. Renewable Energy
- 120 GW new capacity
- Over 200 new dams
- 8 new wind farms
- 70 MW
- Project in the West
- 5 MW
5. Imported Oil and Gas
- From Kazakhstan and Burma (Russia not mentioned?)
- Increase in length by 15,000 Km at cost of over $US 60 billion
Section 12: Create/Complete a Comprehensive Transportation Network
- Complete the current planned national highway system by adding about 9,000 km to achieve 83,000 km.
- This is about 8,000 km longer than the U.S. national highway system.
- Complete national high speed rail, at cost of 300 billion RMB.
- Complete passenger rail system to 45,000 km.
- Complete Western lines linking Tibet and Xinjiang to Eastern regions.
- Complete coal transport lines from Shanxi and Inner Mongolia
- Total cost of over $US 100 million
3. Light rail in cities
- Complete light rail in 21 urban metropolitan areas
- Complete six new ports for heavy materials
- Add 440 new 10,000 ton berths
5. Civil Aviation
- New Beijing airport
- 11 new regional airports
- Cost a minimum of US$100 billion
6. The Plan does not mention electric transmission. Required is:
- Five ultra high voltage lines from Western China and SW China to transport electricity from on site coal fire power and in West and hydro power from the SW.
- New coal fired power plants sufficient to increase current capacity by at least 70%.
D. Impacts of The Plan
There is no mention of how this massive infrastructure/manufacturing base transformation project will be funded. The Plan ignores the issue both of cost and means of funding.
- Conservatively, the cost over the next five years is several trillion dollars U.S.
- The current budget does not provide for funding any of these projects.
- China does not have a municipal bond market and private funding seems unlikely.
- The only likely source of funding therefore seems to be lending from the Chinese banks
- Lending at this scale will likely be massively inflationary. The bad loan pressure on Chinese banks will be increased
The focus of the entire project is to transform China into a modern industrial powerhouse on the model of Japan/Germany/Korea. Assuming the plan can be successfully funded, there are several issues that are not addressed in The Plan. The most important are:
- What is the source of energy for fueling this plan? Pipelines and power plants are of no benefit without petroleum, natural gas and coal to fuel those plants.
- Who will purchase the new products produced? China has little use for such advanced industrial production. So who will buy: The U.S.? The E.U.? Japan?
- The Plan is based on the following foundation:
- Keep the wages of the Chinese people low.
- Provide no profitable place for investment of the limited income earned.
- Provide little social safety net.
- Thereby force the people to deposit money in the local banks.
- Take money from the banks and use it for infrastructure development, loans to industry and real estate speculation.
The question then becomes how long will it be possible for China to operate under this paradigm.
E. The Plan Simply Ignores Certain Issues, Including:
From a Keynesian perspective, there are three sources of inflation:
- Demand Pull
- Cost Push
The Plan is likely to create all three sources of inflation.
From a Monetarist perspective, The Plan will flood the economy with M2 currency, creating inflation on a massive scale. Fiddling with interest rates and bank reserves will likely have little impact.
2. Housing cost in urban areas.
The plan provides for building 32,000,000 units of low income housing. The Plan makes no attempt to address the issue of the cost of housing in urban areas.