The impact of China’s 12th Five Year Plan

Author: Yongsheng Zhang, DRC

China recently wrapped up the National People’s Congress (NPC) and Chinese People’s Political Consultation Conference (CPPCC) with the approval of the 12th Five Year Plan (FYP) (2011-2015).

At the top of the new blueprint is a commitment to transforming China’s development model from the current low-efficiency, high-growth model to a more balanced model that seeks to address a whole range of increasingly important concerns. The targets of the new model include economic growth, structural adjustment, social services development, carbon mitigation and environmental protection, and transparency and governance reforms.

Calls for the transformation of China’s economic development model are not new. Since the early 1980s, China has been aiming to improve efficiency, and move from a GDP-oriented, export-oriented model of growth to a ‘well-being’-oriented, home market-oriented. This time the call has different implications.

In the past, calls for development were for marginal improvement of the development model. This time, in addition to the efficiency improvement, is to avoid potential economic crisis. Behind China’s average 9.8 per cent GDP growth over the past three decades lie a host of issues that have the potential to lead to serious problems in the future.

New economic risks and imbalances are emerging beneath the surface of China’s high growth economy. Trade surpluses have resulted in huge foreign reserves, excess liquidity, high inflation pressure, and bubbles in the capital and property markets. High GDP growth has not brought about a proportionate increase in human well-being across society, and public services are facing supply bottlenecks. Regulation and monopolies have unbalanced industry, and while there is an oversupply in the manufacturing industry, there is a shortage of service sector providers, particularly in medicine, education, finance, and banking. Finally, there is now a huge and growing level of risk associated with local government debts.

If these issues are not dealt with properly, they may lead to real crisis in two ways. First, the risks associated with these issues may simply accumulate until they are untenable. Second, if growth slows down — likely to happen as China’s industrialisation cycle ends — the problems that are now hidden will be plain for all to see.

Rapid growth has also brought about rapid environmental degradation, a fact that makes China’s shift to a low carbon economy increasingly imperative.

China must achieve two transformations. First, it must take the economically and socially ‘balanced’ model of high-income Western societies as a benchmark. But this is not enough. All countries, including China, need to initiate low-carbon growth, both to lower emissions and to deal with fossil fuel depletion.The 12th Five Year Plan has set a target for reduction in carbon intensity by 17 per cent, and an increase in the share in consumption of renewable energy options. This is in the broader context of China’s 2020 goal of reducing carbon emissions by 40–45 per cent.

China sports distinct advantages in the move to a low carbon growth model. The transition cost will be lower for China than for advanced economies, as it is not locked into a high carbon model to the same extent. It also does not face a competitive disadvantage relative to advanced economies in ‘green’ industries. Green technology levels are relatively similar in the developed and developing worlds. China has a dynamic economy, and it has the opportunity to continue to feed growth with new renewable energy industries.

Nonetheless, if these advantages for green growth could turn to reality depends on whether China could improve its institution through deepening its reform. In his report on the NPC and CPCC, Premier Wen Jiabao urged the government to ‘comprehensively deepen the reforms and open up,’ and ‘to further enhance the governmental reform.’ In the past, calls to transform China’s development model have not been so successful as the self-enforcing mechanism for transformation has not been established through reforms. Now, there is real impetus for change. The potential crises hidden in the current development model are being more widely recognised.

If these challenges could be properly responded through reforms, then China should be able to transform its economy successfully, and maintain a relatively high growth in the future. If that is the case, then the time for its size of economy to be the largest in the world may be much earlier than many thought, given its size is already as big as US$ 6 trillion. Still, China has a long way to go to catch up to the Western world in terms of per capita GDP. Given its big economic size and its deep integration into the world economy, the 12th Five Year Plan is not just a domestic issue; it is an issue for the rest of the world as well.

Yongsheng Zhang is Senior Research Fellow at the Development Research Center of the State Council (DRC), PRC.

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  • Andrew Elek

    Thank you for this very helpful summary.
    Best wishes,
    Andrew Elek