Future Agenda for the PRC

6.1 What does the current 10^th plan lead us to expect for PRC next 11^th five-year plan? (part 1)

The PRC’s 10^th five-year plan ( “jihua”) ends this year. The broad thrust of the next five-year plan will be announced at the Central Committee of the Communist Party of China’s (CPC) meeting in September 2005, followed by the adoption of the plan at the National People’s Congress (NPC) in early 2006. Although limited information has been released about the content of the next five-year plan, it is possible to predict some features of the plan based upon the current plan in force.

Previously, the CPC decided the five-year framework without any consultation from outside groups. Now it places greater importance on ensuring transparency and democratic process, as was seen during the preparation process for the current 10^th five-year plan when the CPC solicited views from scholars and enterprises. However, the extent to which these outside opinions were incorporated in the 10^th plan remains unclear. Compared with past plans the numerical targets were reduced and the main numerical target was set “to double GDP by year 2010 vis-à-vis 2000.” Practically, this amounts to an average growth rate goal of approximately 7 percent annually. Because indicative figures by sectors were also included, these features could indicate that the status of the five-year plan is gradually changing from compulsory to indicative.

As for policy issues the 10^th plan appears to emphasize “development” rather than “reform and adjustment.” Perhaps PRC authorities intended to signal an end to the “reform and adjustment period” and highlight that “development” under the 10^th five-year plan will allow people to enjoy “a moderately well-off life” ( “xiaokang shenghuo”). Specifically, it proposed increased expenditures in health care, education, automobiles, and various housing-related services. The 10^th plan also underscored the importance of addressing regional imbalances and placed the goal of increasing rural income as a high priority policy. All this reflects the concern of the PRC authorities about the widening income gap between urban and rural areas.

When the 10^th plan was launched people complained that the proposed favorable treatments were insufficient to improve the regional disparities, particularly in rural areas. The 10^th plan stressed a need for industrial structures to be upgraded and optimized to ensure that economic growth relies upon a more efficient use of resources. PRC authorities realized that economic growth during the 1990s was mainly supported by an increase in labor and capital. The intention of the 10^th plan was to improve these growth patterns by supporting further reform, implementing more open policies, and developing information and technology (IT) to foster sustainable long-term growth. (28 June 2005)

6.2 What will the PRC’s 11^th five-year plan be? (part 2)

Many things can be predicted about the PRC’s next, 11^th five-year plan “guihua”). Since last year the new administration has been trying to elevate the “philosophy of scientific development” “kexue fazhanguan”) (see Note 2 page 52) to the same level as the Three Representations ( “sange daibiao”) and Deng Xiaoping’s theories. Although this philosophy has yet to be clearly defined, it is generally seen as a theoretical framework to foster long-term sustainable economic development while avoiding the negative effects of environmental degradation and resource constraints. The 11^th plan may well reiterate issues such as “to enhance the quality of life” and “industrial restructuring,” but this time with an overarching philosophy of scientific development. Seeing the ways that this philosophy is expressed and whether it will become a dominant framework in the PRC, will be of interest to outside observers.

One expectation is for the new 11^th plan to highlight issues that address regional imbalances since this is now an urgent priority of the new administration. In fact, the administration has already launched two initiatives to develop the northeast and central regions while continuing the former administration’s “Go west” policy. The new administration deviates somewhat from the former one in its focus on building a “harmonious society” to try to correct certain imbalances. This policy direction will likely continue in the 11^th plan, and accordingly the plan may receive more popular support than the previous one.

In an effort to honor new commitments since joining the WTO, the PRC has continued deregulation measures and has taken steps to open up its markets. The new 11^th plan will reconfirm the traditional PRC policy of inviting foreign investment, correct the imbalance between capital inflow and outflow and its impact on the exchange rate and foreign reserves, and strengthen the international competitiveness of PRC enterprises. It is also quite possible that the plan will highlight and endorse the “Go overseas” “zouchuqu”) policy. In fact, the Chinese Academy of Social Sciences predicts that overseas investment equivalent to US$8 to 10 billion a year is expected during the 11^th five-year plan period. This is 4 to 5 times more than was invested in the 10^th five-year plan period.

As for the decision-making process, the current trend to solicit views from a wide range of groups in the society will continue and possibly even grow. The CPC and the central government now welcome the views of scholars, research institutions, and political circles outside of the CPC, and try to implement their ideas in the 11^th plan as appropriate. In addition, future planning will place less emphasis on numerical targets as the overall nature of the plan becomes increasingly indicative and qualitative. In the medium to long run, it will be important to note changes in the status or the nature of the five-year plan itself, since the plan is a kind of mirror that reflects the degree of progress toward a market-oriented economy in the PRC. (7 July 2005)

6.3 Final thoughts on the PRC’s 11^th five-year plan (part 3)

Four key concepts will illustrate the thrust of the PRC’s next 11^th five- year plan for economic policy: “urbanization” ( “chengshihua”), “marketization” ( “shichanghua”), “globalization” ( “quanqiuhua”), and “restructuring” “gaige”). The overarching philosophy supporting these concepts will be the creation of a “harmonious society” “hexie shehui”) based on the principles of scientific development. This is expected to become a symbolic guiding principle for the Hu Jintao and Wen Jiabao administration, much as the “three representation” principle was for the former administration.

Urbanization will be a key component as the role of cities in the PRC economy is set to become more important, and since the population in urban areas is projected to exceed that of rural areas. Marketization and globalization will also be crucial as the plan pursues further deregulation and the open market policies in accordance with the commitments to the PRC entry to the WTO. Once liberalization measures aimed at opening the PRC financial market are completed the PRC financial sector will be an integral part of the global financial market. And more market-oriented economic policies are expected to allocate resources more efficiently and build up the so- called “socialist market economy.” Restructuring, also referred to as “industrialization,” will reflect an attempt at changing the focus of economic growth from capital investment to human resources investment. This will allow more people to enjoy the benefits of growth ( “yirenweiben”). The ratio of investment to GDP already reached the unsustainably high level of over 40 percent in 2003.

Generally the 11^th five-year plan is headed in the right direction. Yet even though these four key concepts are interdependent, some of them are compatible where others may be in conflict. For example, the opening of the Chinese market to the outside under the globalization of the world economy obviously requires more market-oriented measures. However, at the same time, developing and strengthening sound and competitive domestic industries while achieving a “soft landing” may require a more gradual approach or even some level of government intervention. This means that globalization may not be completely in line with the concepts of marketization. Furthermore, urbanization certainly calls for a tremendous shift of population from rural to urban areas, but until now this population shift has resulted in environmental degradation, poverty, and unemployment in urban areas, in effect worsening the quality of life and thus conflicting with concepts of restructuring.

Dealing with these problems while restructuring to achieve a more balanced economy may also necessitate government intervention, which again complicates marketization. For this restructuring, if the PRC authorities try to raise total factor productivity and use their “demographic bonus” “renkou hongli”) to make economic growth more sustainable, they will need to define the government’s role in education, population policy, and technological development. On balance, pursuing these four guiding principles over the next five to 15 years will require examination of the interrelationships of these goals, an effort to prioritize them as necessary, and careful consideration of the roles that government and market will play in order to reach a more developed stage of the socialist market economy. (20 July 2005)

6.4 Toward a more sustainable development of the PRC economy (part 1)

Environmental degradation has become a critical issue in the PRC. Greenhouse gas emissions now account for approximately 14 percent of total worldwide emissions, second only to the United States. Dioxin emissions in the PRC are the world’s largest, currently 20 times greater than Japan. Auto emissions are a significant concern in urban areas. Acid rain contamination is spreading: in 1985, affected areas accounted for 18 percent of total land. During the late 1990s the amount of total land affected by acid rain increased to 40 percent. Water contamination is severe with 70 percent of major rivers reported to be seriously contaminated.

Desertification and loss of biodiversity are also concerns. Since the late 1990s an additional 3,500 hectares have suffered from desertification. Nearly one fourth of the total land has become desert. Among the 640 wild fauna and flora to be protected under the CITES convention (Convention on International trade in Endangered Species of Wild Fauna and Flora), over 150 are found in the PRC. At 15 percent, the proportion of endangered species in the PRC is higher than the world’s average. Considering these facts, most observers now agree that the environmental situation in the PRC has reached a critical stage.

Given the borderless nature of environmental degradation this issue is rightly concerns neighboring countries. For example, acid rain and yellow sand storms in the PRC occasionally reach both the Korean Peninsula and Japan. The increasing emission of greenhouse gases in the PRC contributes to global warming. A key characteristic of environmental problems is that they are viewed as a market externality that cannot be automatically addressed by market forces. The PRC has vigorously pursued a market-oriented economy placing economic growth and industrial development as a top priority. It would appear that environmental impact was not given serious consideration.

For example, during visits to the PRC in early 2000 this author recalls asking some senior PRC officials what measures were being taken to address environmental problems. The PRC policymakers understood the question to be related to the “investment environment” for foreign-funded enterprises, and they proceeded to explain efforts to attract FDI by introducing favorable treatment for foreign enterprises. This response reflected the primary concern of the PRC central government at that time, which was to maximize GDP growth even if it meant accepting other negative factors to achieve that end. Local government policymakers also competed with one other to maximize growth and receive positive evaluations or promotions from the central government. This resulted in the problem of “false reporting of official statistical figures” especially by local governments. The concluding part of this article will look at how the situation is gradually changing. (16 August 2005)

6.5 Toward a more sustainable development of the PRC economy (part 2)

The sentiments of PRC authorities toward sustainable development are changing noticeably. A significant triggering event is the scheduled summer 2008 Olympic Games to be held in Beijing where municipal authorities are eager to show off its clean air and an environmentally friendly capital city to international visitors. Reports state that the municipality plans to complete all Olympic-related infrastructure projects by the end of 2006, reserving 2007 for making fine adjustments to the construction and management of Olympic facilities.

The discussion on sustainable development is extending beyond the Olympic games as is evidenced by a number of articles in local newspapers reporting on initiatives to create the “recycle economy” “xunhuan jingji”). In early 2005, a task force on the PRC’s circular economy development strategy under the National Development and Reform Commission (NDRC) announced overall strategic targets for developing the recycle economy. Three stages were identified to take place over the next 50 years with major economic indicators such as energy efficiency, recycle utilization rate and waste disposal in an ecological environment being slated to reach advanced international levels.

For the first stage (2005 to 2010), the strategy calls for establishing a sound legal framework, policy support system, technological renovations, and an effective control mechanism to facilitate the recycle economy. Conferences and workshops are being held with promising titles, such as “China: Building a resource- efficient society” jointly organized by NDRC, Development Research Center and the China Development Research Foundation. Many high- level PRC policymakers were in attendance.

Attempts to introduce a “green GDP” have become an urgent concern for both scholars and authorities since 2004. It is reported the National Statistical Bureau, NDRC, Environment Protection Bureau and other relevant ministries are jointly developing a calculation system for a green GDP that would incorporate the cost of protecting the ecological environment and natural resources. Preliminary estimates conducted by some experts indicate that if environmental degradation is taken into account, growth of the green GDP during the past 15 years is only 78 percent of the officially reported GDP growth rate. The National Environment Protection Bureau announced a performance evaluation system that takes account of environment- related indicators. This system has been experimentally introduced in several provinces including Suchuan (), Hebei (), and Shandong (). As a result, local policymakers may pay more attention to environmental protection and shift their focus from maximizing growth and tax revenue.

These policy changes appear to coincide with the inauguration of the new Administration. As such, these changes are part of the initiative to create a “harmonious society” (hexie shehui) based on the “idea of scientific development” (kexue fazhanguan), both of which the new Administration stressed at the NPC. This is a very encouraging sign, but a great deal more remains to be done if PRC is to actually realize these goals instead of only raising expectations. (17 August 2005)

6.6 Cooperating on the Clean Development Mechanism

The Clean Development Mechanism (CDM) is designed to make it easier and less expensive for industrialized countries to meet the greenhouse gas (GHG) emission reduction targets agreed to under the Kyoto Protocol. The CDM also aims to assist developing countries in achieving sustainable development by addressing environmental degradation and at the same time promoting the transfer of environment-related technology from advanced countries to developing countries. Under the Protocol Japan committed to reduce GHG emissions by 6 percent until 2012, which like many other industrialized countries is deemed to be a very tough target to meet. This is why the Japanese government, as well as business circles, recently began to participate actively in the CDM. Japan’s GHG Reduction Fund, which is supposed to be engaged in the purchase and resale of emission reduction in developing countries including PRC, was set up under the sponsorship of major Japanese private companies and policy-lending institutions.

The PRC’s GHG emissions account for more than 10% of total emissions globally, making it the second largest emitter in the world. One hopes there will be many worthy investment projects for reducing GHG in the PRC. Normally project information notes (PINs) and the Project Design Document (PDD) illustrating the outline of any project are required to be submitted to the purchasers of credit emission reduction (CER). There are a couple of key criteria for screening PINs, which include environmental and social safeguard requirements (compliance with laws and regulations), project feasibility and development impacts on host country. However, the most controversial criterion is “additionality,” namely whether the project contains some innovative elements to reduce GHG. If the project is a simple traditional energy-saving project, the emission rights pertaining to the project cannot be accepted, which makes the project unviable. From this viewpoint, it seems that although there a number of projects started in the PRC, there are still not so many which include such innovative elements.

Since many projects are managed by local governments and state-owned enterprises, the purchasers are required to negotiate with the governments to agree on the price of CER and it takes time, as PRC governments are reported to be quite tough about prices for CER. Private companies run some projects, but even in such cases, the company concerned is required to seek government prior approval before agreeing to the CER price. Most PRC authorities still hold to the view that all matters relating to natural resources should belong to government. Nevertheless, many observers agree that PRC is a potentially huge market for CER (see Note below). The PRC itself became aware of the importance of GHG reduction projects and fully appreciates that CDM can help promote technology transfers from industrialized countries; something that the PRC has been very keen on for many years. However, if any of the above factors become a bottleneck in cooperation between PRC and Japan, it would be a missed opportunity for both countries, since Japan has advanced technologies relating to environmental conservation, and will continue to face difficulties in achieving its reduction targets by 2012. (30 November 2005)

6.7 11^th five-year plan period will be critical for an ageing PRC

In the midst of a rapidly ageing East Asia, the PRC is no exception. According to UN criteria, PRC has already become an aged society with an over-60 aged population of 143 million, or more than 10 per cent of total population in the PRC in 2004. These figures, combined with improvements in life expectancy and the “one-child policy” introduced in the late 70’s, predict that the rate at which ageing affects PRC’s economy will be unprecedented.

A recent report by the PRC National Ageing Working Committee points out a few unique features of this situation. First, the size of the aged population is huge. It is expected that the population aged over 60 will become 200 million and then 300 million in 2014 and 2026 respectively. It will hit a peak of 400 million in 2037 and will become stable afterwards (about 30 per cent of total population will be aged). Due to these estimates the speed of ageing in the PRC is much faster than other countries. The report says that it took more than 45 years for other countries to increase the share of population aged over 65 from 7 per cent to 14 per cent, while in the PRC’s case, it is expected to take only 27 years. There are also some apparent distortions in the ageing picture. The male population is already much larger than female and this discrepancy is expected to widen. In addition, the ageing situation differs from the East coast to inland areas, and between urban and rural areas. Currently ageing in urban and coastal areas is faster, but as immigration from inland to urban areas develops, ageing in rural areas is also expected to progress rapidly.

However, the most important characteristic may be that unlike many other countries, the PRC will have turned into an aged society before it became a fully developed and matured society. In many other developed countries, including Japan and countries in Europe, economies first became mature then aged for various social and economic reasons. In other words, these economies could afford the costs of ageing whereas the PRC economy does not necessarily have the strength yet. Moreover there is a strong cultural tradition in the PRC that families and relatives should support old people. The fact that there is no nationwide pension and social safety scheme in place suggests just how difficult the ageing problem will be for the PRC authorities over the long run.

The good news is that in the short to medium run, the abundant labor force in the PRC should lessen the impact that ageing will have on the PRC economy. Rather, population experts point out that the PRC ought to enjoy a “demographic bonus (renkou hongli)” for the next ten years thanks to the declining fertility rate. Currently the population aged 15 to 65 and the population under 15 years account for 70 per cent and 15 per cent of total population in the PRC respectively. These percentages are much higher than in other developed countries. Furthermore, although theory generally indicates that household propensity to save would decline as ageing develops this is not the case in the PRC. Many households try to save more to prepare for ageing because they take into account their low incomes and the lack of a social safety net.

This can be seen as both good and bad; it will contribute to sustaining investment-led economic growth for the time being but will not be sustainable in the long run. As the outlook for 2006–2020 by the PRC Development Research Center correctly points out, ageing is one of the major risk factors for sustainable development, in particular for the critical period of 2010–2020. Therefore, it will be essential for PRC to upgrade its economy and to begin to prepare for the coming aged society during the 11^th five-year plan period while the PRC can still take advantage of its population bonus. (20 March 2006)

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