China's 12th Five Year Plan

This is part III of our relatively new series setting forth how we “really feel” about the issues that have generated controversy on our blog over the years.” Part I dealt with guanxi and the comments to that post alone have made it a great read. In Part II we talked of how we love joint ventures because they are typically our law firm’s biggest money maker, but we hate them because they so seldom work out for our clients.

We started this “How We Really Feel” series because we have taken many strong positions over the years, but in some cases those positions have been at least somewhat misunderstood and this new (and irregular) series is intended to clean up misconceptions.

This post is a bit different than the first two in the series because it is a mostly a link-over to an interview co-blogger Steve Dickinson recently did with the Chengdu Living (a must-read regional China blog) right after his talk at the Chengdu AmCham on China’s 12th Five Year Plan.

The Chengdu Living Post is entitled, “Expert Analysis: Interview with Steve Dickinson Of China Law Blog” and it is well worth a read, and not just because it is so complimentary of Steve and our blog. It is worth the read for its discussion on Chinese law and on how that law is so often perceived and mis-perceived by Westerners and on how we (speaking through Steve) really feel about China and about blogging:

Chengdu Living: We know you as one of the authors of China Law Blog, tell us a little about that. When did that get started

Steve: Well, it was an interesting start. Dan Harris (the other author of China Law Blog) and I have have known each other since 1986, we both practiced law together in a big Seattle law firm. He went one way [formed my own law firm] and I went another [taught Chinese and international law at the University of Washington Law School] and in the early 2000’s we decided to get back together to do a program in China. It was Dan’s idea, not mine, to use a blog as our primary vehicle for creating our identity in China.

My idea was, I’ve been working in Asia since 1984, and consistently the law is misunderstood and misreported…. and so I agreed that I would do that [the blog] with Dan under the agreement that I would be able to write about what’s really going on in Chinese law….that’s been our focus with the blog.

*   *   *   *

Chengdu Living: Was the blog created with a business motivation or was that an ancillary effect?

Steven: There was a business motivation, but in 2006 [our first year] blogs were pretty new. We had no notion of what blogs would become or how blogging would become integrated into the business world, so we’ve kind of developed with the blogosphere together.

*   *   *   *

Chengdu Living: It’s interesting that China Law Blog is a category and yet it has such a broad appeal in the China blogosphere. Was it intended to be for a wide audience or were you thinking it would be for people in the [legal] industry and legal trade?

Steven: In terms of what we were thinking and what happened, that’s interesting. In the United States, China Law Blog has been voted several times as the best blog in the legal area, period. Nothing to do with China. And the reason is that most legal blogs are frankly, without personality and quite boring. Where our blog has our two personalities and we let the personalities show through. Most lawyers don’t allow that and so most law blogs have never succeeded for that reason. And it’s still that way. There has not been any improvement in the law world on the blog side. But we’ve enjoyed it. It’s been fun for us.

Chengdu Living: Among readers and clients, what are some of the greatest misconceptions that people have about China or China Law?

Steve: There’s a couple. The first is that, we’re Americans and much of our readership is from the US, Canada, and England. And much of what’s strange about Chinese law is because it’s civil law, not common law. So a lot of what we have to explain is that Chinese law is based on a completely different legal tradition. And that’s the area I enjoy working with, because it’s been my area of research and interest for a long time.

The other, of course, is that most foreigners believe that China doesn’t have any law, period. And so a lot of what we’re doing is just making clear to people where the law is in China and how it affects their daily life and the fact that there really is a law here [in China] and it needs to be used effectively and creatively.

*   *   *   *

The other group we have are people who think we’re full of nonsense and are critical of what we say. And they’re fun to deal with, too. Because there are two groups like that:

  • There’s the Chinese people who think that what we say about China is based on the fact that we don’t understand China. Everything I write is based on Chinese sources, so that’s a funny comment, I believe.
  • There there’s the other group, where we’re not China cheerleaders or detractors, we’re kind of in the middle. And the China cheerleaders don’t like what we write.

Chengdu Living: You do a great job of staying neutral.

Steven: Yeah, that’s our goal. To be as neutral as we can while still being true to our real beliefs.

Dan and I are politically very far apart but we both like and are willing to accept foreign countries and foreign cultures. And we don’t expect them to be clones of our own culture and that’s what gets us through a lot of these things. To have a genuine, not just a respect for, but a genuine affection for foreign cultures, and we both have that feeling about China.

What do you think?

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 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.

We have already done a number of posts on China’s 12th Five Year Plan and co-blogger Steve Dickinson seems to be spending about half of his life these days speaking on the Plan before various Chambers of Commerce. Here are our previous posts:

We are writing and speaking so much on China’s new Five Year Plan because it is important to nearly all businesses involved with China.

One of the things we are always saying here is that the Chinese government is actually pretty good in telling businesses what its goals are and then sticking to those goals. If your business nicely lines up with those goals, good things are likely to happen to you in China. If your business does not line up with those goals, bad things could result. Sometimes the key is not so much the nature of your business, but the nature of how you explain your business. That is particularly true when seeking to register a WFOE. For more on that, check out “How To Form a China WFOE. Scope Really Really Matters.

The above is actually just a prelude to my recommending you read The Brunswick Group’s stellar analysis of the Five Year Plan here [link no longer exists]. From a business perspective, Brunswick emphasized the following three things:

GDP growth lowered to 7%
over the 12
th
 Five-Year
Plan period.
To become a “moderately
prosperous society”
officials seek to diversify
the economy and grow the
service sector.
• Services: The service sector will be further promoted with the goal of
raising its value added contribution to GDP by 4%.
• Urbanisation: Urbanisation is expected to increase from 47.5% to
51.5%.
• R&D: Investment in R&D will increase to 2.2% of GDP.
• Healthcare: Further reform of the pharmaceutical and healthcare system will be enacted with a focus on improving the basic medical and
health care systems and expanding availability.  In addition, basic pension and medical insurance systems will be expanded to cover all urban
and rural residents and the proportion of expenses for medical treatment paid out of the medical insurance fund will be increased to over
70%.
• Environment: The proportion of non-fossil fuels in primary energy consumption should reach 11.4%; energy consumption and CO2 emissions
per unit of GDP should be reduced by 16% and 17% respectively; and
the release of major pollutants should be reduced by 8% to 10%.
Stringent environmental
goals are prominently
detailed in the 12
th
 FiveYear Plan.
• Employment: Over the next five years an extra 45 million urban jobs
will be created, an increase approximately the size of the population of
Spain.
• Income: Per capita disposable income of urban residents and the per
capita net income of rural residents will rise by an annual average of
over 7% in real terms.
• Corruption: The government voiced continued commitment to making
“institutional changes to end the excessive concentration of power and
lack of checks on power, and resolutely prevent and punish corruption”.
3. 2
  • GDP growth lowered to 7% over the Five-Year Plan period.
  • To become a “moderately prosperous society,” China must seek to diversify the economy and grow the service sector.
  • Stringent environmental goals are prominently detailed.

If you are like us and cannot get enough analysis of the Plan, I urge you to read The Brunswick Group’s report.

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.

By Steve Dickinson

The 5th Plenum of the 17th CCP Central Committee completed its meeting in Beijing on October 18. here is the full text of that meeting. Aside from various political issues, the major task of the plenum was to adopt the outline for the 12th Five Year Plan that will guide China’s economic development of China from 2011 to 2015.

The plenum approved the outline for the plan, entitled The Communist Party of China (CPC) Central Committee’s Proposal on Formulating the Twelfth Five-year Program (2011-2015) on National Economic and Social Development. The Chinese version of that document was published on October 27. The formal plan will be drafted on the basis of the Proposal and will be submitted for approval at the next meeting of the National People’s Congress, scheduled for March 2011. One wonders what China will do in the first quarter of 2011 when there is no formal plan in effect. I am reviewing the Proposal and will publish some reports on its contents shortly.

Though there has been much speculation and discussion in the foreign press regarding the probable contents of the 12th Plan, I have been looking more at the the concerns of the local Chinese. In preparing for my review of the Proposal, my research assistant and I gathered several hundred pages of local Chinese language internet news reports on the 12th Five Year Plan. I was surprised to find that over 80% of the concerns were about a single issue: income disparity. The following concerns were constantly expressed:

  • There is a growing disparity between the highest income earners and the lowest income earners (the GINI coefficient).
  • There is a growing disparity between the incomes of urban residents and rural residents.
  • There is a growing disparity between the incomes of residents of the coastal provinces and the residents of the rest of Western, Central and Northeast China.

These are common complaints of “uneven development” that have been the subject of concern in China for some time. We also saw the following new, more troubling, concerns consistently expressed:

  • The percentage increase in the wages of Chinese citizens has not grown as fast as the percentage increase in China’s overall GDP.
  • Though China has a high savings rate, the percentage increase in the savings of Chinese citizens has not increased at the same rate as the percentage increase in the Consumer Price Index. This means that even though the Chinese save, they are actually falling behind in terms of wealth accumulation.

Overall, the feeling is that “if China is now the second largest economy in the world, why don’t we feel better off?” The underlying theme is that “clearly China has made a lot of money over the past 10 years, but where did all that money go?” It certainly did not go into the pockets of the Chinese urban factory and service workers and it certainly did not go into the pockets of the Chinese farmers.

This theme is the basis for the new book by Lang Xianping 郎咸平 (Larry H.P Lang), a distinguished Hong Kong University Chinese economist. Lang’s new book, published in September, is entitled “Why Is Our Life So Hard? Why Is Our Income So Low? Why Are Our Prices so High? Why Do Our Businesses Struggle So Hard?” (我们的日子为什么这么难) (He apparently likes long titles). This book has only been out for a month and is already the number 2 best seller in Qingdao. This shows how its theme resonates with the local public. Professor Lang also has a blog (in Chinese) here.

In the first chapter of the book, Lang points out the strangeness of wage structure with the following key numbers:

  • In 2009, China’s domestic consumption as a percent of GDP was 29%. No modern country has ever achieved such a low number. The number for the U.S. is about 70%. Even the number for Africa is about 50%.
  • The percentage of wages in China as a portion of GDP is 8%. This number is so low that it really cannot be understood. The number in the U.S. is 58%. The number in Mexico is 33%. The number in the Philippines is 27%. In most of Africa, the number is 20%.
  • China has the lowest average wage in the industrial world at $.80 per hour, with the highest number of hours worked at 2,200 per year. Compare this to Brazil, for example, where the average hourly wage is $2.25 and the average hours worked per year is 1,841.

Given this data it is no surprise the average Chinese worker feels left out of China’s economic miracle. That is, the “economic miracle” was created by sacrificing the Chinese wage earner. Lang’s point, stated more forcefully, is that these numbers show there has been no Chinese miracle for the average Chinese.

I will leave the obvious social and political implications to others and just examine what this all means for foreign businesses in or involved with China.

Clearly, the pressure is enormous in China for an upward push in wages in every segment of the economy. This means that for foreign businesses outsourcing product in China, making product in China and operating service businesses in China the party is over. All companies operating in China will see sharp increases in wages over the next five years. This trend simply cannot be avoided. This sharp increase in Chinese wages will then have a knock on effect, pulling up wages in places like Vietnam and Cambodia that look to China for a lead in manufacturing wages and costs. This is the future. Get ready for it.

Professor Lang answers the “why” question he poses in his book’s title by asserting it is all a European/American imperialist plot explicitly designed to exploit China on an imperialist model. This answer is why he is permitted to publish his gloomy books: all of China’s many problems can be attributed to foreign plots. Lang is an interesting character: a Wharton School PhD who is an avowed student of Lenin’s views of Western imperialism. He is by far the most popular economics writer in China today and must be taken seriously. Though I question his mono-causal analysis, I agree with much of what he says in this and other books about the structure of the Chinese economy.

China’s wage storm is coming.

What do you think?