Emerging Markets

China: Transitional changes under the Twelfth Five-year Plan

Liu Yanhua, 06 Jan 12

In 2011 China entered into the implementation phase of its Twelfth Five-year Plan for National Economic and Social Development (12th Five-year Plan). The 12th Five-year Plan comes at a crucial time for the building of a moderately prosperous society in China. To achieve the goals of the 12th Five-year Plan, social transition is necessary which will be achieved in part through reform, liberalisation and transition of its economic development model.

Between 2000 and 2010, China's annual average gross domestic product (GDP) growth rate reached 10.5%. The average annual urbanisation rate was 1.36%. In 2010 China's per capita GDP exceeded USD 4,000. China's urban residents' disposable income and rural per capita net income have increased over the past decade by 152% and 97% respectively. Around 95 million people have made the transfer from rural to urban living over the past decade. The population below the poverty line has been reduced to 26.88 million from 94.22 million. A stable low birth rate has been maintained following the implementation of the family planning policy. Significant improvements have been made in education, science and technology, culture, health and sports, contributing considerably to the overall quality of life in China. Energy consumption per unit of GDP and water consumption per unit of industrial added value have been reduced by 44% and 68% respectively. Chemical oxygen demand has dropped by 14%, the installed capacity of de-sulphurised thermal power has been increased by 83% and forest cover from 16.55% to 20.36%.

The 12th Five-year Plan has put forward specific goals for a number of important quantitative indicators. For example, GDP is predicted to reach RNB 55.8 trillion by 2015 from RNB 39.8 trillion in 2010 (in constant 2010 prices). By 2015, China's per capita GDP should reach USD 6,000 – 7,000, close to the developed world's average. China's urbanisation rate is expected to reach 51.5%. R&D as a percentage of GDP should reach 2.2% by 2015 (as opposed to 1.8% in 2010). The state's investment in R&D will be close to the level of developed countries. Energy consumption per unit of GDP is expected to drop by 16% and carbon dioxide emissions per unit of GDP will drop by 17% (40-45% lower in 2020 than in 2005). Major pollutants will be significantly reduced. Water consumption per unit of industrial added value will be reduced by 30% and non-fossil energy as a percentage of total primary energy should reach 11.4% by 2015, increasing to 15% by 2020. The forest cover will rise to 21.7%, with the forest stock volume being increased by 6 billion cubic meters. In the outline of the 12th Five-year Plan, all these quantitative indicators, together with many others, are rigid and compulsory. To achieve these quantitative targets, China needs to make strenuous proactive efforts, while overcoming currently unforeseen difficulties.

Economic theory holds and the development experience of countries elsewhere have shown that when a country or region's per capita GDP reaches the range of USD 3,000 to USD 10,000, a stage of accelerating economic and social development will follow. This is a key stage for transition, with many unpredictable difficulties and challenges that must be faced, including falling into the "middle income trap".

There are about 60 000 words and a total of 16 chapters in the 12th Five-year Plan. It is rich in content covering all aspects of economic and social development. The focus of the 12th Five-year Plan remains China’s economic development, as well as the promotion of political, cultural, social and ecological milestones. These five pillars form the foundations of China's overall development goals.

There are a few substantive differences between the 12th Five-year Plan and the 11th Five-Year Plan. Four main points are addressed: growth and development; adjustment and reform; innovation drive; and the improvement of people's livelihoods.

I. From "economic growth" to "economic development"

After 30 years of reform and liberalisation, China has made remarkable progress in its economic and social development. However, unbalanced, uncoordinated and unsustainable phenomena have also occurred as a by-product. These include: increasingly rigid constraints of resources and the environment; an imbalance between investment and consumption; widening income gaps; a lack of technological innovation capacity; an irrational industrial structure; weak agriculture infrastructure; uncoordinated urban and rural development; employment pressure; inflation; social tensions and institutional barriers. To resolve these problems, fundamental solutions must be found.

Previously, China emphasised that the economy and society would develop "faster and better", as a result of the pursuit of economic growth and development. The 12th Five-year Plan changes this emphasis to "better and faster" development, so that the focus is on qualitative rather than quantitative growth. A holistic approach is also being undertaken in a bid to achieve comprehensive, coordinated and sustainable development.

The 12th Five-year Plan stresses in particular the promotion of natural resource conservation, green development and an environmentally-friendly society. This must coexist with policies promoting expanding consumption, optimising investment structures and scientific and technological innovation. In the 12th Five-year Plan period, a number of rigid quantitative targets have been put forward for "green development". For example, the efficient utilisation coefficient of agricultural irrigation water is targeted to increase to 0.53; energy consumption per unit of GDP should decrease by 16%; water consumption per unit of industrial added value will be reduced by 30%; carbon dioxide emissions per unit of GDP will be reduced by 17%; total pollution emissions reduced by 8-10%; and the forest cover rate be increased to 21.66%. These indicators are being broken down for implementation purposes for the provinces and with the coordinating support of the National Development and Reform Commission and other ministries.

These targets cannot be realised simply by chanting slogans, establishing principles, or merely providing direction. They must be translated into actions and practices. Among the many issues to be addressed include controlling greenhouse gas emissions; promoting the creation of a carbon emissions trading market; enabling adaptation to climate change; preventing and reducing the losses caused by devastating natural disasters; and to strengthen international cooperation on these and other issues. In terms of resource conservation and management, the focus will be concentrated on energy management; water management; land management; and the management of mineral resources. With regards to recycling, efforts will be made to promote cleaner production; waste recycling; green consumption; and corresponding technology development.

The 12th Five -year Plan, for the first time, proposes the concept of building ecological security, which includes ecological barrier construction, protection and governance. It also proposes the construction of ecological and resource compensation mechanisms.

II. Adjustment and reform

The 12th Five-year Plan allows adjustment for economic and social development within macro, industrial, regional and management structures.

The Plan's macrostructures outline what will be produced and the necessary structural changes required to meet production targets. For example, in 2009, China’s steel production was about 700 million tonnes. China is the largest global steel producer, followed by Japan, with an output of about 100 million tonnes. Around 30% of China's iron and steel output is exported to foreign countries, with the rest used for domestic consumption. China's cement output in 2009 was 1.6 billion tonnes, accounting for more than 60% of world production. In addition, China is still an important producer of coke and photovoltaic cells, as well as a production base for low value-added commodities. These figures demonstrate that China has been relying on unsustainable energy and resource use for economic development, which must be adjusted in the next stage of development.

China's industrial restructuring is the key to its industrial development. Food is a major priority, for China as well as the rest of the world. In the process of structural adjustment in agriculture China needs to modernise its agricultural production; address food security; increase farmers' income; improve rural production methods and living conditions; and improve the institutional mechanisms of rural development. These problems are exceptionally challenging, requiring enormous hardships and efforts to implement them. In order to ease this transformation, phased strategic plans for implementation at a sub regional level have to be created. All this has to be undertaken in the context of urbanisation and urban planning.

The key to the adjustment of traditional industries is to enable their transition and modernisation. Over the past 30 years, traditional industries have been structured according to an industrial model. Seen through the perspective of the life cycle, many traditional industries will have to be readjusted before realising their full profit potential, resulting in some short-term sacrifices. The transition of traditional industries includes eliminating backward production capacity; deployment of key industries; technological upgrading within enterprises; corporate mergers and acquisitions; and small and medium enterprise (SME) development.

The fostering and development of emerging industries will support China's future economy. The 12th Five-year Plan targets the share of added value to be provided by emerging industries of 8% of GDP. This will, to a large extent, rely on strategic emerging industries, which include energy saving and environmental protection; new information technology; biotechnology; high-end equipment manufacturing; new energy; new materials; and new energy vehicles. The strategic development of emerging industries will become an important landmark in China's economic transition.

The transition of traditional industries will facilitate the fostering and development of emerging industries and new consumption. China has a population of 1.3 billion. If its consumption level reaches the global average, it will be more than 20% of the world’s total.

The development of the service sector will be another key element in the adjustment of the industrial structure in China. China's service sector is still in its infancy. The ratio of service industry within GDP in developed countries frequently exceeds 50% rising to even 70%; while in China it is less than 30%. China needs to foster the development of traditional and modern consumption patterns; adapt to the supply/demand/supply patterns of the domestic and international markets; and the use of international management models. During the 12th Five-year Plan period, China's service sector should be greatly enhanced.

China has undertaken far ranging economic reforms and liberalisation measures over the past 30 years. These will continue with further reform. This basic principle is now deeply engrained in Chinese society.

There are five driving forces to accelerating the transition of economic development.

  1. Basic economic system reform. This includes the equal use of production factors by various economic sectors; engaging in fair market competition; and equal protection under the law, both for outbound and inbound systems.
  2. Administrative system reform. This will build a service-oriented government under the rule of law; transform government functions; and improve government decision-making, with particular attention given to administrative accountability.
  3. Fiscal and taxation system reform, particularly the secondary allocation of public finance.
  4. Financial system reform, mainly focused on a diverse financial system with an efficient level of service, prudent regulation and risk-control.
  5. Reforms to resource-based product prices and environmental protection charges. China needs to establish and improve a pricing mechanism for resource-based products which should reflect market supply and demand. This would represent resource scarcities and environmental costs in a transparent manner and promote structural adjustment, resource conservation and environmental protection. This is closely related to the green development initiative.

For China, "opening up" means the liberalisation of trade. This should be improved at a regional level by the combination of wider opening up in accordance with regional coordination and development, and by the opening of ports, both coastal and inland, and border points. China will continue to stabilise and expand external demand, optimise its foreign trade structure, accelerate the transition of foreign development trade, cultivate new competitive export strengths, and develop foreign trade in services. The authorities will co-ordinate the joint policies of "ushering in" and "going global", paying equal emphasis to inwards and outbound investment. Over the past 30 years, many foreign companies have invested in China through development zones, a practice that will be continued. Meanwhile, China will also seek to take domestic enterprises global. The government will work with developed and other developing countries, building a win-win strategy in which both parties cooperate in investment projects. As China expands and engages globally, it must participate in the global economic system and regional cooperation to enhance mutual trust and cooperation.

III. Innovation

Innovation is a must in the context of globalisation and the field of information technology. Without innovation, there will be no new impetus for development. Innovation requires drive, adjustment and reform. The first issue to be addressed is scientific and technological R&D. China has launched 16 key state science and technology projects through which core technologies are challenged, emerging industries supported and China's economic transition promoted. Enterprises should be put at the forefront of innovation, with more public funding invested in the infrastructure of scientific institutions, which includes basic scientific research, laboratory and hub building. In order to promote innovation effectively, tax incentives and credit schemes should also be reviewed. Investment in people is also important. China needs to strengthen quality education and training as they are important elements for innovation. The end goal should be that China's science and technology policies should enable companies and scientists to turn their scientific and technological achievements into products.

There are three elements in green innovation and green development - technology, policy and the business model. Green development is supported by three kinds of technologies - recycling technology, low carbon technology and eco-technology. Recycling technology targets traditional industries, and the efficient and multi-level use of resources. Low-carbon technology is intended to resolve the issue of energy shortages through energy conservation and the development of renewable energy. Finally, eco-technology focuses on improving quality of life, stabilising the ecological balance and improving ecological conditions.

The implementation of green development and technology faces three limitations. First, many technologies are technically feasible but unfeasible economically, that is they perform well in the laboratories, but are too costly when implemented. This must be addressed by further research. Second, some technologies are technically and economically feasible, but unfeasible institutionally, as there is no exchange or coordination between different sectors. Third, if technology transfer mechanisms and a market are not in place, the respective responsibilities of government and other stakeholders need to be defined to avoid unnecessary internal friction and conflict.

IV. Improve people's livelihoods

The overall improvement of people's livelihoods is mainly the responsibility of public finance, in that more low-income and vulnerable segments of the population can enjoy the well-being brought by social development. During the 12th Five-year Plan period, great efforts will be put into this, in particular to provide excellent public service; increase employment; adjust income distribution; improve social security; and improve health care and housing conditions. The 12th Five-year plan has included the concept of a "happiness index", gauging the extent to which individuals can live contentedly in a stable and fast developing society and economy. These key indicators have been incorporated into China's overall development plan. In some European countries, social security systems are relatively well developed and contribute to overall satisfaction. China may seek to cooperate with the European Union in order to learn more about its social welfare system, and its contribution to citizen satisfaction.

The 12th Five-year Plan has clearly stated that the income growth of residents will be synchronised in line with the country’s economic progress, so the growth of labour remuneration will match the growth of labour productivity. This suggests that income levels will greatly improve in tandem with future economic development and help bridge income inequalities and the urban-rural gap. Improved living conditions, a reformed social security system and improved infrastructure will lead to a more stable and harmonious society.

Conclusion

These four aspects surrounding the 12th Five-year Plan are my understanding and reflections of China in transition. We believe that our country has a promising future, but faces a bumpy road ahead. In the coming five years, China will have to face and overcome many obstacles. The problems we will encounter are those Western countries have encountered over several centuries, but have emerged simultaneously in China and accumulated in a condensed time period.

China is at a critical moment for its strategic development and is entering into a new phase in its economic evolution. The People’s Republic of China was established 60 years ago, with a planned economic model introduced 30 years ago, utilising planning plus production as the main development mode. Over the last decade, China entered into a golden period of development, whose dominant driving forces are reform, liberalisation and international trade. China has now entered into its third 30-year development period. How will China develop? I believe China needs to rely on two long-term developments, restructuring (the adjustment of the economic/social structure) and innovation (to support and drive the restructuring).

Liu Yanhua

Liu Yanhua

Liu Yanhua is a native of Beijing. He was born in 1950, and graduated from the Natural Geology Program of the University of Science and Technology of China with a master's degree, and obtained a doctorate from the Chinese Academy of Science. Liu has held posts in the office of geography at the Academy, including director and doctoral supervisor. From 2001-2009 he served as Vice-Minister of Science and Technology. He was speaking at the 12th International Sustainability Leadership Symposium 2011, held at the Centre.


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