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China in 2015

Decoding China’s New Five-year Plan

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Decoding China’s New Five-year Plan

Source:AFP

China's 12th five-year plan will be launched next year and bring six dramatic economic policy reversals. Is Taiwan – and the world – ready to deal with them?

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Decoding China’s New Five-year Plan

By Fuyuan Hsiao, Sherry Lee, Shu-ren Koo, Benjamin Chiang
From CommonWealth Magazine (vol. 456 )

In the coming month, the global media will focus its attention on China. When the fifth plenary session of the 17th Chinese Communist Party Central Committee is held in Beijing in October, the highlight will be the debate over the draft of the country’s 12th Five-Year Plan for Economic and Social Development. The five-year plan is China’s most important development blueprint, and this year’s version will affect the economic direction of China, Taiwan, and even the rest of the world.

Over the past year, China has experienced the global financial crisis, rising labor costs and industrial restructuring, and in the middle of the year, it signed an economic cooperation framework agreement (ECFA) with Taiwan. Between 2011 and 2015, the years covered by the new five-year plan, the country will produce US$38 trillion worth of goods, roughly 95 times Taiwan’s GDP. This massive economic potential has spurred Hong Kong to lobby Beijing for a piece of the action by being incorporated into the plan.

What will be the key elements of China’s newest economic map and what are the opportunities and threats it will bring to Taiwan? CommonWealth Magazine offers an early analysis and forecasts where China will be in 2015.


Over the past five years, China's GDP and national income have soared and its overall economic strength has risen meteorically, becoming nearly the equal of the world's top economic power, the United States. The so-called "G2 era"has arrived.

When the fifth plenary session of the 17th Chinese Communist Party Central Committee opens in Beijing in October, the top item on the agenda will be the country's 12th Five-Year Plan for Economic and Social Development. The plan will try to change the stereotype people around the world have of China through the introduction of six major reversals of the economic policy that has guided the economy over the past three decades.

Reversal No. 1: From National Power to People's Well-being

The first change in mindset promoted by the five-year plan is to abandon the blind pursuit of GDP in favor of per capita income growth. The head of China's National Development and Reform Commission, Yang Weiming, said the biggest difference between the new plan and economic blueprints of the past is its emphasis on people's well-being rather than national power by raising income levels and narrowing the rich-poor divide. (See Table 1)

Reversal No. 2: From Exports to Domestic Demand

In its 11th five-year plan (2006-2010), China emerged as the world's factory and the biggest exporting country, with exports accounting for 40 percent of its GDP. Only Germany among advanced countries has such a high ratio. Huo Jiazhen, the director of Shanghai Tongji University's School of Economics and Management, observes that if an imbalance exists in domestic and export demand, China becomes too vulnerable to international economic volatility. As a result, China must sacrifice the speed of its development over the next five years to make structural adjustments, transitioning from manufacturing and exports to services and domestic demand.

Chang Wu-ueh, the chairman of Tamkang University's Graduate Institute of Chinese Studies, says there are very few examples in the world of countries such as China that have per capita incomes exceeding US$3,000 but service sectors that account for only 43 percent of GDP. Under the new five-year plan, China's service sector will take off in the coming years, and Chang believes that with only 10 percent of Taiwan's total investment in China directed toward the service sector, it provides an ideal opportunity for Taiwan's service-oriented businesses. (See Table 2)

Reversal No. 3: From the World's Factory to China's Factory

According to The Economist, wages in China have risen 60 percent over the past two years, and foreign exporters that invested in China to take advantage of its cheap labor will gradually be drawn by the country's increasingly wealthy consumers to focus on the domestic market, eventually turning the world's factory into China's factory.

The McKinsey Global Institute estimates that consumption currently accounts for only 36 percent of China's GDP, but that should exceed 40 percent over the next five years. By 2015, the institute says, China will have 4.4 million wealthy households (defined as those with annual incomes over 250,000 renminbi, or US$36,000), the fourth most of any country in the world, after adjusting for purchasing power parity (PPP). (See Table 3)

This suggests that China is also becoming a global consumption center, meaning that factories, markets and competition will all co-exist there in the next five years.

Reversal No. 4: From Black Cat to Green Cat

At Taiwan Cement Corp.'s facility in southern China, two hours by car from Guangzhou in the city of Yingde, massive excavators rumble loudly as they dig out limestone from one side of the quarry while dozens of employees busily plant trees and landscape the terrain on the other side. Because Taiwan Cement's facility in Guangdong Province stresses environmental protection and green manufacturing, it will be able to sustain its operations there.

The 12th five-year plan is leading the way on China's transition to a green country. The National Development and Reform Commission has provisionally set dozens of green development indicators in the plan, and they will account for over half of all of the plan's indicators for the first time ever. China's government will evaluate the performance of officials based on their "green achievements,"and the promotion and administrative performance evaluations of leaders will be decided by whether or not they met the green development indicators.

"All the black cats are finished and all the green cats have begun to grow' is a phrase making the rounds in business circles. Black cats are being closely watched, and if it gets out that you're polluting, you'll be dead. So if I want to continue existing, I have to change from a black cat into a green cat,"says Hu Angang, the director of the Center for China Studies at Beijing's Tsinghua University and the man responsible for researching green development policies in the 12th five-year plan.

Green energy industries will be dominant during this period. McKinsey & Company predicts that investment in clean energy technologies will eclipse spending in the sector in past years, with additional expenditures totaling between 1.9 trillion and 3.4 trillion renminbi (approximately NT$9 trillion to NT$16 trillion), as much as Taiwan's annual GDP. (See Table 4)

Reversal No. 5: From Accepting the World to Shaping the World

In his book What Does China Think? Mark Leonard, the executive director of the European Council on Foreign Relations, argues that the main goal of China's reforms and economic liberalization over the past three decades was to enter the world system, while the next 30 years will be devoted to breaking out of the system and shaping the world.

Over the next five years, China will freely exercise its voice, setting standards itself rather than respecting the standards of others. Zhang Xiang, China's former deputy minister of Foreign Trade and Economic Cooperation, who has visited 94 countries around the world, says China has been at a major disadvantage because it did not establish standards. One example he cites is when Chinese banks went to list overseas, they were given the lowest possible rating by Standard & Poor's. Zhang contends that in 2007 alone, "incorrect ratings"cost China 1 trillion renminbi for no reason.

China is now promoting its own ratings mechanism with Chinese characteristics, and has applied for certification with the U.S. Securities and Exchange Commission. The mechanism would ensure that China has the power to set prices and standards, and countries and foreign companies wanting to invest in China or interested in soliciting Chinese investment would have to respect China's ratings system.

Reversal No. 6: From World's Factory to World's Office

China's strong protectionist bent has been criticized as discriminatory against foreign investors. But although workers' wages in China have doubled over the past half decade, foreign investors have still grit their teeth and gotten involved in China's development to gain market share and grab talent. As a global research center, customer service center and corporate headquarters, China now hosts more than 1,200 R&D centers and over 500 regional headquarters established by multinational companies. Of the world's 500 biggest companies, 480 have set up subsidiaries there.

This is helping China move toward a white-collar economy, and transform itself from the "world's factory"into the "world's office."CommonWealth Magazine's reporter based in Beijing, Sherry Lee, observes that an increasing number of international CEOs regularly visit China, and she conservatively estimates that 110,000 people with foreign passports live in Beijing and 150,000 live in Shanghai. Under the 12th five-year plan, China hopes to create 10 million jobs a year. Directly or indirectly, global salaried workers are almost all earning renminbi.

"The next round is seeing China evolve from Chinese factories to Chinese markets, Chinese offices and Chinese R&D centers. It will inevitably become the world's office,"Hu says.

Over the past half decade, China has told the world a "black story"that belongs to someone else. But as the 12th five-year plan plays out over the next half decade, the tale China hopes to tell the world is a "green story"all its own.

Translated from the Chinese by Luke Sabatier

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