March 2011 – China 12th Five Year Plan:  FAQ

China’s 12th 5-Year Plan (12-5YP) for the period 2011-2015 was formally issued on Mar. 17, 2011.  Here are answers to some commonly asked questions:

Q:  How does the 5YP work?

A:  The Central Government formulates the 5YP in a process (stewarded by the National Development and Reform Commission, NDRC) that takes almost a year and is a combination of top-down and bottom-up input – similar to a corporate planning process.  Once formally ratified by the National People’s Congress, the Plan is translated into initiatives at the ministerial, regional, and local levels and concrete strategies are developed to achieve the objectives.

Q:  What are some general objectives of the 12-5YP?

A:  The 12-5YP has several important themes:

  1. Restructure the economy:  maintain steady growth while moving towards an internal demand-led economy and increasing the weight of the services sector
  2. Promote social equality: continue to develop West/Central China, boost rural wages and upgrade the social safety net
  3. Green China: set new targets to reduce energy usage and pollution per unit of GDP, put emphasis on developing next-generation industries

Q:  What are China’s growth targets for the coming 5-year period?

A:  The government has set an average growth target of 7% which is less than the 7.5% in the 11-5YP.  However it must be noted that in the past 30 years the growth rate has averaged 9.3%.  For the 11-5YP period growth was at 8% or above except in 2001. GDP growth is the most politically sensitive "headline number"and the target will likely continue to be comfortably exceeded.

Q:  How is the 12-5YP different from its predecessor, the 11-5YP?

A:  The major themes are similar, but the 12-5YP appears to place even more emphasis on social equality issues and the environment.  The Central Government wishes to encourage “harmonious” social development that does not further widen the already significant gap between the wealthy and other segments of society (the term “harmonious society” 和谐社会 has become ubiquitous over the past few years).  The 12-5YP can be regarded as an ambitious social experiment – and like it or not, foreign companies will be forerunners in that experiment, for example, as collective bargaining for wages becomes more common.

For past commentary, see Archives and References.

Q:  What was achieved in the 11-5YP?  What were some of the gaps?

A:  Major achievements of the 11-5YP include enormous strides in infrastructure development, such as the spread of high-speed rail into a countrywide network, expanding the expressway system, new airports, stadiums etc.  China also improved its environmental track record, with significant progress in areas like energy use per unit of GDP and reduction of sulfur dioxide.  The Beijing Olympics (2008) and Shanghai Expo (2010) were successful, highly visible signs of China’s new stature in the world.  However in certain segments, industry restructuring (eliminating old, inefficient and highly-polluting capacity) proceeded less smoothly than expected, largely due to employment concerns.  In the 12-5YP it is intended to strengthenindustry rationalization by introducing cap-and-trade or a “Carbon Tax”.

Q:  What are major threats to China achieving its 12-5YP?

A:  There are a number of internal and external issues that could potentially derail the plan.  Among the most important are the ramp-up in commodity prices, especially food, the possibility of a double-dip recession in the US and the overdependence of the Chinese economy on new construction (almost half of gross investment).   The government’s attempts to restrain the real estate bubble and control inflation have been partially successful, but the policy response is walking a tightrope and could tip the economy into a lower-growth mode.

Q:  What are some opportunities and issues for foreign companies?

A:  The 5YP includes plans to develop seven “nationally strategic industries” in the fields of energy saving, renewable energy, electric vehicles, advanced materials, “high-end equipment” (e.g. railway), next-generation IT and biotech.  China is expected to plow roughly $300 billion a year in new investment into these areas over the next 5 years, taking their weight from around 2% of GDP today to around 8% in 2015 and 15% in 2020.  Investments in such areas will receive preferential tax treatment among other incentives.  Foreign companies will be encouraged to participate in these developments but in a supporting rather than a leading role – having good Chinese partners will be critical.  Increasingly, China is looking to develop based on indigenous technology, so companies that are willing to bring their core IP to China will be favored over companies that protect their IP.

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