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 

1. Coal:

  • 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

3. Nuclear

  • Concentrate on coastal regions
  • 40 GW new capacity
  • Over 50 new reactors
  • Cost at over $150 billion

4. Renewable Energy

a. Hydro

  • 120 GW new capacity
  • Over 200 new dams

b. Wind

  • 8 new wind farms
  • 70 MW

c. Solar

  • Project in the West
  • 5 MW

5. Imported Oil and Gas

a. Pipelines

  • 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

1. Highway

  • 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.

2. Rail

  • 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

4. Ports

  • 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:

            1. Inflation

From a Keynesian perspective, there are three sources of inflation:

  • Demand Pull
  • Cost Push
  • Expectation

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.

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.

China needs more coal. The United States has more coal than it needs. President Obama is vowing to double U.S. exports. Sounds like we have everything in place for increased coal shipments from the United States to China, right?


In an article entitled, “Coal Foes Play China Card: Critics of Export Terminal Warn of Environmental Harm Abroad From U.S. Fuel,” the Wall Street Journal does a truly great job explaining what is going on with attempts by big-Coal and Longview, Washington to start shipping U.S. coal to China from the U.S. West Coast.

To grossly summarize the article (which I strongly urge you to read), the divide is betweenthose who favor converting the Port of Longview into a port capable of shipping coal to China from Montana and Wyoming. Those who oppose the port being used for this purpose oppose coal going to China at all. Those who favor the coal shipments argue that the mining and shipment of the coal will create American jobs and provide China with less polluting coal than it currently uses. Those who oppose the shipments argue that the mining, shipping and eventual use of the coal will cause environmental and climate change damage.


Where do you stand?