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China’s 12th Five Year Planor how to turn an oil tanker around
January 2011
Alexander van KemenadeSenior Analyst, Access ChinaEconomist Intelligence Unit
Report card: The 11th Five-Year Plan (2006-2010)
Economic growth/jobs A+ Beat previous GDP growth records, exceeding target by 2007
Economic rebalancing
External imbalances D Made token efforts to appreciate currency and abolish export subsidies in beginning, but trade surplus swelled to unprecedented levels in 2007. Efforts were abandoned entirely during economic crisis. Small signs of progress noted recently.
Excessive investment D Minimum effort to address distortions in financial system eg. interest rate and financial services liberalisation. Economic stimulus brought credit and investment growth to unprecedented levels.
Innovation- and services-based growth
C Some technological breakthroughs (world’s fastest supercomputer) were made, but copycat culture is still pervasive and intellectual property is still a concern.
Inclusive growth
Boosting farm incomes B- Continued with rural fiscal reforms, with some effect. Food prices also allowed to rise (to some degree), thus increasing farm incomes. Rural governance remains exceedingly poor.
Reducing regional disparities
A- Invested substantially in inland and western infrastructure. Economic growth has gradually shifted inland
Social security expansion B+ Enacted a labour law, although enforcement is patchy. State-subsidised health insurance now nearly universal, first nine years of education now free.
Environment
Energy intensity of output B Target reached, mainly by consolidating heavy industry (50% of targeted closures reached), but helped by last-minute blackouts.
Pollution D Targets for reduction of SO2 emissions and Chemical Oxygen Demand were reached. However, scope of targets was unambitious. Overall air quality in cities worsened, and a number of shocking environmental disasters were observed.
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China in 2011: Planning for a structural shift
• From quantity to qualityUnemployment less of a concern than in the pastHowever, growth imperative remains
• Chinese economy becoming more “normal”Labour market developments suggest surplus labour is nearing exhaustionInflation now a permanent concern
• Growth will be harder to come byDemographics, shift from exports to domestic demand, gradual erosion of competitivenessPressure to climb value chain
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From 11th to 12th Five-Year Plan
• Key themes unchanged, slight shift in focusEconomic rebalancing◦ Stronger wording
► “Establish a managed floating exchange rate system determined by market supply and demand…pursue a balanced external account…gradually realise greater convertibility in various types of renminbi assets”
◦ Factor price liberalisation► “Steadily advance reform of interest rate liberalisation”► Electricity, water
Inclusive growth◦ Housing affordability and security◦ Gini coefficient targets?◦ Hukou (household registration system) reform
Environment◦ Binding carbon emissions reduction targets◦ Renewables + nuclear
Implementation outlook
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• Inclusive growth• Income distribution will begin to correct itself through labour market forces• Individual income tax adjustment• Monopoly industries• Rollout of hukou reform will streamline access to public services• Health care to receive more funding
• Environment• Continued consolidation of polluting industries• Renewables + nuclear--hydro to see largest capacity increase • But energy (and fossil fuel) demand will continue to soar
• Economic rebalancing• Pilot program: Some banks to set their own interest rates• Eventual full float of yuan?
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What’s missing
• Rural land reformEstablishment of fair systems for farmers to sell land
• Bloated state-owned sectorCrowding out by SOEs, high degree of regulatory and political risk for private sector players
• EducationAcademic corruption, outdated curricula, poor environment for basic research
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