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China’s 12th Five Year Plan

2011/12/15

Hongbin Cai

Guanghua School of Management

Peking Unviersity

• Background of the Plan

• Theme and objectives of the Plan

• Specific Initiatives of the Plan

• Implications of the Plan

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What is the “Five Year Plan”

• In the central planning era, each 5 year plan contained detailed economic

development targets and measures for all its regions and sectors. The

state used to underwrite funding for all projects included in the plans.

• In the post-1980 reform era, the plans have become more advisory and less

prescriptive. Starting with the 11th FYP, the term jihua, meaning “plan”, was

changed to guihua, meaning “guideline”. This change signified a shift to a

more hands-off approach by the government to direct the economy.

• As a result, the emphasis of both the 11th and 12th FYPs has shifted from

enumerating hard production targets to setting broader principles.

Accordingly, it only guarantees funding for key infrastructure projects

• FYP can be understood as key indicators of the directions and changes

in development philosophy at the highest levels of Chinese leadership.

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• In November 2008, after consulting thousands of experts and scholars, the NDRC

convened a 12th FYP preparatory task force. By late 2009, the NDRC had formed

the principles of the plan and began drafting the 12th FYP.

• After the draft was revised by the Central Committee, the 12th FYP Guidelines

were endorsed by senior State Council and the Party Central Committee leaders

at the Fifth Plenary Session of the 17th Central Committee of the Party on

October 18, 2010, which provide the overarching themes of the 12th FYP.

• Over the next four months, the National Experts Committee, consisting of 37

experts chosen by the Chinese State Council, reviewed the draft. The NDRC also

began to accept comments on the guidelines from the public.

• On March 14, 2011, this process culminated in the ratification of the Outline

(gangyao), which includes concrete targets and is generally referred to as the

“Five-Year Plan”.

• It is a long and complicated process of consensus-building and compromise-

seeking among numerous interest groups.

The Formulation of the 12th FYP

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• Following the release of the national FYP, provincial and

municipality governments and industry regulators draft their

corresponding guidelines and special plans.

• These guidelines and special plans are followed by

implementation measures (such as policy documents) by the

departments named in the special plans.

• In addition to the five-year targets, the government also sets

annual targets to implement the plan through yearly

government work reports.

• It evolves over time and details are constantly reviewed and

revised.

Implementation of the FYP

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• China’s previous plan, the 11th FYP (2006-10) was notable for the

introduction of the concept of the “harmonious society.”

• The 11th FYP stressed the need to move away from the growth-at-all-

costs approach to a more balanced “scientific development,” meaning

that besides quantitative growth in GDP, quality growth such as equality,

environment and energy conservation should be emphasized.

• To reflect the shift of the development model, the plan set up targets such

as energy and resource conservation, GDP share of education spending

(4%), urbanization rate, health coverage.

• If measured by meeting the targets, the 11th FYP was implemented quite

successfully. Major progress was made in areas like rural health reforms.

• This is especially impressive given the financial and economic crisis of the

world economy since 2008..

Major Themes of the 11th FYP

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• Three out of 22 targets were missed. • inadequate growth in the service sector: share of GDP 43.0% (target 43.3%)

and share of employment 34.9% (target 35.3%).

• Inadequate R&D spending: share of GDP 1.8% (target 2.0%).

• Other missed targets (not in the plan, but by government pledges in

other forms) • Inadequate spending on education: 3.59% of GDP (target 4%).

• high housing costs and health costs. …..

• ….

• Meeting the targets may not be a good thing (you get what you measure)

• Because of the unexpected financial crisis and because of other more

fundamental reasons, during the 11th FYP, China failed to address

underlying structural problems.

Mission unaccomplished

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Export-led growth is not sustainable

Net trade as share of GDP

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Consumption vs. Investment

Consumption and investment as shares of GDP (%)

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Urban-rural inequality remains large

Urban-rural income gap as % of urban income

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Service sector remains small

Service industry as % of GDP in China versus US

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R&D expenditure remain small

R&D expenditure as % of GDP – China vs. US

• Background of the Plan

• Theme and objectives of the Plan

• Specific Initiatives of the Plan

• Implications of the Plan

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• The 12th FYP is largely an extension and acceleration of the themes of the

11th FYP, to finish the unfinished work.

• “Transforming the economic development model” was the theme of the 11th

FYP, now “accelerating the transformation of the economic development

model” is the central theme of the 12th FYP.

• The 12th FYP is to create a scientific development model through a

restructuring of economic strategies and priorities.

• The objective of economic growth should be to achieve a more harmonious

society, and to spread wealth more equally amongst the population. It needs

to be more inclusive.

The Central Theme of the 12th Five-Year Plan (2011-15)

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• A rising share of consumption A more balanced growth strategy relying more on consumption, less on

exports and investments.

• Moving to a low-carbon economy Both the quality of life and the potential for growth are in danger as a

result of pollution, including global climate change

• Promoting Innovation Moving from “made in China” to “Created in China”.

• These contrast with the existing pattern of growth: heavy

energy use, infra. investment and low-cost manufacturing.

Three Key Objectives

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• Binding goals

• Certain targets in the 12th FYP are mandatory (“binding goals”).

• Detailed guidelines for these “binding goals” will be introduced by

the government in due course, and will divide the targets into more

specific annual goals, so as to ensure better compliance.

• These will enter directly into the performance evaluation of

government officials.

• Nonbinding “expected goals”

• Compared to previous FYPs, the 12th FYP has relatively fewer

binding goals, and instead elaborates a large number of broader

nonbinding expected “targets”.

• The nonbinding “expected goals” provide guidance and direction for

policies, but with much less stringent compliance standards.

• These will be considerations of the performance evaluation of

government officials.

Binding and nonbinding goals

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• GDP to grow by 7% annually; lowered from 7.5%

in the previous FYP (Expected)

• Factor price reforms (the price of capital, utilities,

natural resources etc.) (Expected)

• Regional development strategies for coastal,

northeast, central and western China (Expected)

Key targets: economic growth targets

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• Rise in domestic consumption, raising its contribution to GDP to 40%

from 35.1% (Expected)

• Service sector value-added output to account for 47% of GDP

(increase of 4%) (Expected)

• Lower the per unit of GDP energy consumption by 16% (Binding)

• Lower CO2 emissions by 17% (Binding)

• Lower the land use required per average unit of GDP by 30%

(Expected)

• Increase the recycling rate for of solid waste to 72% (Expected)

• Increase percentage of non-fossil fuels in primary energy consumption

to 11.4% from 8.3% (Binding)

Key targets: sustainability

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• Reduce total discharge of major pollutants by 10% (Binding)

• Increase the forest reserve by 600 million cubic metres, to achieve

a forest coverage rate of 22% (Binding)

• Increase R&D expenditure to 2.2 % of GDP and every 10,000

people to have 3.3 patents (Expected)

• The size of arable land will remain at 1.818 billion mu or 121.2

million hectares (Binding)

• Reduce 30% of amount of water usage per average unit of

increased industrial production (Binding)

• The efficiency ratio of irrigation to be increased to 0.53 (Expected)

Key targets: Sustainability

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• More than 45 million jobs are to be created in urban areas (Binding)

• Urban registered unemployment is to be kept below 5% (Expected)

• Prices to be kept generally stable (Expected)

• Wage increases to be in line with GDP growth. The growth rate of disposable

income in cities and net income in rural areas to increase at 7% every year

(Expected)

• Minimum wage to increase by no less than 13% on average each year

(Expected)

• Complete construction of 36 million units of affordable housing (Binding)

Key targets: living standards improvements

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• Urbanization rate to reach 51.5%, up 4% (Expected)

• Pension schemes to cover all rural residents and 357 million urban

residents (Binding)

• Increase the compulsory education (first nine years of schooling) rate to

93% from 89.7%, and the high school admission rate to increase to 87%.

(Binding)

• Population control: the total population is to be not more than 1.39 billion,

which means continuation of the family planning policy (Binding)

• Average life expectancy to increase one year to 74.5 years (Expected)

Key targets: social development

• Background of the Plan

• Theme and objectives of the Plan

• Specific Initiatives of the Plan

• Implications of the Plan

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• The concept for developing SEIs is to enable Chinese enterprises to

compete in high-end value-added industries at a global level

• Bio-technology

• New energy

• High-end equipment manufacturing

• Energy conservation, environmental protection

• Clean-energy vehicles

• New materials

• Next-generation IT

• The government will use preferential tax, fiscal and procurement policies

to develop the SIEs, and will invest its own funding – and will likely

approve partnership of private capital with public funding

• It sets a clear goal to grow these seven industries from 5% of GDP in

2010 to 8% by 2015 and 15% by 2020.

Strategy 1: Focus on Seven Strategic

Emerging Industries

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• Promoting “Indigenous innovation” is to build up R&D

capacity of the country.

• Specific targets for the 12th Five-Year Plan are:

• Expenditure on R&D to account for 2.2 % of GDP

• Every 10,000 people to have 3.3 patents.

• The government will substantially increase spending on

research and education, and will also use preferential tax and

procurement policies to encourage private spending.

Strategy 2: Promoting Indigenous Innovation

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• Phase out excessive capacity that is technologically inferior or polluting

• Move up the value chain and encourage indigenous innovation

• Reallocate industries from the coastal to inland areas

• Encourage industrial consolidation, mergers and acquisitions (e.g.., in

automotive and pharmaceutical industries) to foster competitiveness.

• Upgrade labor-intensive production, and promote higher-value exports

(such as machinery and high-tech products), while exports of high-energy

consuming products, polluting industries and excessive usage of natural

resources are to be limited or phased out.

• Promoting development of service industries. In particular, the theme of the

current central committee meeting (2011) is to promote “culture industries”.

Strategy 3: Industry Restructuring

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• The Chinese government plans to shift focus of economic growth (and

infrastructure investment ) towards inland regions.

•Different regions will have different development priorities.

•New regional development clusters are to be fostered through strategic

cooperation.

•China’s western region development strategy will continue, with its special emphasis on

natural resources, transportation and the reallocation of manufacture from the coast.

•The north-eastern region will focus on the development of heavy industries and modern

agriculture.

•Central China will focus on agriculture, manufacturing and the creation of logistics hubs.

•Coastal regions will “upgrade”: to spearhead economic restructuring and the formation of

indigenous R&D centers, upgrading technology, moving up the value chain, building up

R&D capabilities and encouraging financial innovation.

Strategy 4: Balanced Regional Development

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• To change course to the “scientific development”, incentives and behavior

of local governments must be changed. The performance evaluation of

government officials will become more comprehensive instead of the

single dimensional GDP measures.

• Improvement of public services and public goods is a key area of

government responsibility.

• Employment and job creation is another a priority.

• More focus on social welfare and equality.

• From “Economic Management” to “Social Management”: safe, orderly,

comfortable, nice living conditions for the citizens.

Strategy 5: Pursuing Social Development instead of Growth

• Background of the Plan

• Theme and objectives of the Plan

• Specific Initiatives of the Plan

• Implications of the Plan

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• IF the 12th FYP is fully implemented, some experts believe that “by 2015, China will be a fairer, greener society. Rising incomes will have boosted consumption and industry will have clambered up the technology ladder.”

– China's economic model will be different ----- moving from the export-

and investment-led growth model of the past 30 years toward a pattern of growth that is driven increasingly by Chinese consumers.

– Harmonious Society: people are richer, income more equal.

– Sustainable growth: better environment, less energy use.

• Obviously, this is a really big “IF”.

If the 12th FYP is fully implemented

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• Growth targets should be able to be met or surpassed (see the next chart). Growth rate is to gradually slow down: 9.5%, 9%, 8.5%, 8%, 7.5%.

• Targets of government spending measures should be able to meet: a substantial rise in expenditure on education, healthcare and pensions, in line with the government’s “harmonious society” program.

• In fact, almost all targets are expected to be met or surpassed. The questions are:

– How they are met: forced or organic

– What they mean: a number game or a real trend change

• There will be progresses in certain areas and to some extent, but fundamental changes as outlined by the 12th FYP are hard to achieve.

How will the 12th FYP be implemented

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Growth targets in previous FYPs

China real GDP growth and the growth target set in the 10th & 11th FYPs

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• The government plans to stimulate consumption through

consumer subsidies, accelerated wage growth, low staple

prices, improve public health and social security system and

improved logistical efficiencies.

• The real change will take much longer:

– Wage growth and income growth need productivity improvement.

– Pension, health and other social security can only improve as the

economy grows. Not realistic to build a welfare state.

– Income inequality will not be reduced sharply in a short time.

• Other reforms are needed, which involves reforming the

government itself. This is hard.

Challenge: Growth Model is not easy to change

Comments Welcome!

Thank You!

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