China's Five Year Plan

A few days ago, co-blogger Steve Dickinson did a post on China’s 12th Five Year Plan, entitled, “China’s 12th Five Year Plan: A Preliminary Look.” This is a follow-up post, reflecting an outline China’s National People’s Congress (NPC) just put up on its website. Steve has been focusing on the Five Year Plan both because he has and will continue to be speaking on this at various embassies and chambers of commerce (The Swedish Chamber is up next) and because it can be higly relevant for foreign businesses doing business in or with China. Here’s Steve’s post:

The PRC National People’s Congress has published on its website a basic outline of the numeric goals of the 12th Five Year Plan, as follows:

The draft of China’s 12th Five-Year Plan (2011-2015) was submitted Saturday to the National People’s Congress (NPC), the top legislature for reviewing.

Following are the key targets of the draft:

Economic targets

  • GDP to grow by 7 percent annually on average
  • More than 45 million jobs to be created in urban areas
  • Urban registered unemployment to be kept at less than 5 percent
  • Prices to be kept generally stable

Economic restructuring

  • Increased domestic consumption
  • Breakthrough in emerging strategic industries
  • Service sector value-added output to account for 47 percent of GDP, up 4 percentage points
  • Urbanization rate to reach 51.5 percent, up 4 percentage points

Innovation

  • Expenditures on research and development to account for 2.2 percent of GDP
  • 3.3 patents per 10,000 people

Environment & clean energy

  • Non-fossil fuel to account for 11.4 percent of primary energy consumption
  • Water consumption per unit of value-added industrial output to be cut by 30 percent
  • Energy consumption per unit of GDP to be by 16 percent
  • Carbon dioxide emission per unit of GDP to be cut by 17 percent
  • Forest coverage rate to rise to 21.66 percent and forest stock to increase by 600 million cubic meters

Agriculture

  • Annual grain production capacity to be no less than 540 million tones
  • Farmland reserves to be no less than 1.818 billion mu

Livelihood

  • Population to be no larger than 1.39 billion
  • Life span per person to increase by one year
  • Pension schemes to cover all rural residents and 357 million urban residents
  • Construction and Renovation of 36 million apartments for low-income families
  • Minimum wage standard to increase by no less than 13 percent on average each year

Social management

  • Improved public service for both urban and rural residents;
  • Improved democracy and legal system;
  • Better social management system for greater social harmony;
  • More than 10 percent of all residents will be registered as community volunteers.

Reform

  • Encourage qualified enterprises to list on stock markets
  • In-depth reform in monopoly industries for easier market entry and more competition
  • Improved government efficiency and credibility

The stated goals roughly follow the CPC Opinion on the Plan discussed in my previous blog post. The following are particularly important/interesting to note:

The GDP growth target is reduced to 7%

The reliance on pseudo-accurate numbers to give the document an air of scientific precision. My favorite is the rise in forest coverage by 21.66 percent.

As always, there is no mention of HOW the plan will be implemented or HOW the plan will be financed.

What do you think?

 

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.