Saturday, March 12, 2011

China: China Shifts to Quality with New Five-Year Plan

The Congress at the Great Hall of the People in Beijing | Credit: Xinhua - Xie Huanchi

By Ren Xianfang* Courtesy IDN-InDepth NewsAnalysis

BEIJING (IDN) - China has released a draft of the 12th Five-Year Plan (2011-2015) at the annual sessions of the National People's Congress (NPC) and the Chinese People's Consultative Conference National Committee (CPPCC) from March 3-14.

A comparison of the document with a similar statement on China's previous five-year plan shows different perceptions of both global and domestic risks by the government, which lays the foundation for understanding the logic underpinning the plan.

On the external front, the government then was mostly worried about the economic and technological predominance of advanced economies, global competition for resources, market, technology and talents as well as trade protectionism.

Now the most prominent global risk is slower global growth, a shift in global demand structure, climate change, energy/resource security, in addition to those in the previous five-year plan with the exception of advanced economies' dominance in economic and technological arenas - obviously an intentional drop due to recent controversies on indigenous innovation.

On the domestic front, the government five years ago was most worried about unbalanced regional development, irrational economic structure, the lack of indigenous innovation, resource and environmental constraints, rural underdevelopment, employment and income distribution.

Now, topping the list of challenges are resource and environmental constraints, the unbalanced relationship between investment and consumption, the widening income gap, lack of scientific and technological innovation, irrational industrial structure, weak agriculture, unbalanced regional development and employment, among others.


It is interesting to note the drop from the plan of the controversial indigenous innovation, apparently in response to foreign investors' uproar on the issue over the past year.

With a new perception about risks, the government's priorities for the next five years have shifted. Growth makes way for development, with the government saying the main theme in the next five-year plan should be "scientific development" and a main thread should be the "transformation of economic development mode" - which has replaced "transformation of economic growth mode", a concept which ran through China's previous three five-year plans.

The shift is best illustrated by the new set of five-year development goals outlined, which has made no mention of a specific per capita GDP goal, widely taken as a sign the leadership is ready to accept a slower GDP growth rate going forward and instead will focus more on welfare improvement and on socioeconomic sustainability.

This focus on development, rather than growth, has multiple implications:

It means that GDP growth is likely to become a secondary goal, and that the leadership may be ready to accept a slower growth rate going forward.
It means the government will instead focus more on welfare enhancement, manifested in greater fiscal spending on social safety net and public services, as well as greater push for faster income growth.

The shift to development also implies greater focus on environmental and resource sustainability, as well as a shift to a growth model powered more by innovation and technological progress than by inputs of labor, resources and capital.

What could help achieve this transition is an overhaul of development goals for different regions in the next five years, and thus of a realignment of incentive structures for local governments based more on development priorities than on growth. The initiative was explored in the previous five-year plan period, and will be formally implemented in the new five-year plan period.

The basic idea is to classify China's territory into four "functional areas" based on the carrying capacity of local resources and the environment, as well as the intensity of existing economic activities and future development potential.

Based on this, the intensity of future economic activities will be regulated by the central government through various fiscal, investment, industrial, population and land policies, as well as through the adoption of different performance evaluation criteria for local governments.

Boosting domestic demand sits at the top of the agenda, and the leadership has made this point by placing consumption ahead of investment and exports in its proposal for the five-year plan. The leaders have called for the construction of a "long-term mechanism for expanding consumption", for which income growth, urbanization and rural development are all key underpinnings.

They have also mentioned "adjusting and optimizing investment structure", which should imply more investment in encouraged sectors and areas, such as agriculture, emerging strategic industries, underdeveloped regions, etc.

For foreign trade, the leadership is apparently looking more at the structure and added value, rather than the gross value of exports.

Imports will also be emphasized, as the government states that China's opening-up drive will switch from one oriented mainly toward exports to one oriented to both imports and exports.

Changing the structure of foreign trade will be a focus, with China probably aiming to lift its global ranking in service trade size to the top three.

To rebalance the relationship between the economy's three components - consumption, investment and exports - the government has realized that it needs to unlock the potential of domestic demand, particularly potential of China's vast underdeveloped regions and the vast rural population.

More importantly, the government is also fully aware of the need to conduct a systematic overhaul of the social, economic, financial, and fiscal mechanisms underpinning the present growth model as China's unbalanced economic structure has reflected myriad distortions in the country's socioeconomic system.


One main component of China's economic transformation is a new industrialization drive.

In the new five-year plan, the government has formally enshrined the idea of pursuing a "new industrialization path with Chinese characteristics", emphasizing the building of a new modern industrial structure that utilizes more advanced technology, which is cleaner and safer, and has higher added value and creates more jobs.

The focus will be on upgrading the manufacturing industry, developing emerging and strategic industries, bolstering the services sector, strengthening energy/transport infrastructure and developing the oceanic economy.

Both the new strategic sectors and the oceanic economy have been mentioned in a five-year plan for the first time.

*This an abridged version of an article by Ren Xianfang that first appeared in the China Daily European Weekly on March 11, 2011 with the headline 'New five-year plan a shift to quality'. The author is a senior China analyst with IHS Global Insight which provides the most comprehensive economic, financial, and political coverage available from any source to support planning and decision making. (IDN-InDepthNews/11.03.2011)