China has formally approved the Five Year Plan (2016-20), which aims to double 2010 income levels by 2020, striving to overcome the "Middle Income Trap" towards a moderately well-off economy. Details of the Five Year Plan are contained in the full text of Premier Li Keqiang's Work Report delivered at the 2016 National People's Congress/Chinese People's Political Consultative Conference (NPC/CPPCC) "Two Sessions" on 5 March, 2016.
The Plan marks the "opening years" of a make-or-break battle to transit to a different development model. The desired shifts are nothing less than dramatic, from exports towards services and domestic consumption, from labor and energy-intensive manufacturing towards innovative, higher-technology and higher value-added production, and from growth characterized by quantity to quality and ecological sustainability.
Considering China's size and diversity, the transformation is unlikely to happen without upheaval, pain and dislocation, including a relatively slower growth rate. My live TV interview on 16 March 2016 with ABC (Australian Broadcasting Television) highlighted some of the domestic and external challenges facing the Five Year Plan.
Those who focus exclusively on China's economic convulsions and short-term stimulus measures are generally underwhelmed by the new Five Year Plan. Download BBVA - CHINA Five-Year Plan 2016-20 Amidst Party-speak characteristic of the "Two Sessions", it is easy to lose sight of some game-changing realities.
Notwithstanding weak global economic conditions, China’s economy has grown from $2.3 trillion in 2005 to $11.3 trillion in 2015.Personal per capita disposable income increased by 7.4% in real terms, overtaking the growth rate of the economy. Premier Li pointed out that one percentage growth now equates in size to 1.5 percent five years ago.
Consumption's share of a much larger economy signifies tremendous growth. According to a report of the US Congressional Research Service of 21 October, 2015, the growth of Chinese private consumption over 2005-14 was among the fastest of any major economy, averaging 8.9% annually compared with 7.3% for India and 1.8% for the United States (Fig. 25, p.35). Evidence points to continuing surges of private consumption even when the country’s overall growth is slowing down. China is already the world’s top market for “e-tailing”, valued at US$615 in 2015, bigger than Europe and the US markets combined. The “Singles' Day” in November 2015 splurged $9.3 billion in 12 hours on world's biggest online shopping day. Clearly there is much pent-up demand. Under the Five Year Plan, more supportive measures (e.g. lower taxes) will be provided to boost consumption.
China's economic transformation necessitates turning some 100 million rural migrants into working urbanites and consumers. The household registration system (hukou) has been changed to provide them with social security and children education on par with urban citizens. In 2015,7.72 million government-subsidized housing units were completed in urban areas. In 2016, 21 million new job-training opportunities will be provided to assist rural migrants in urban relocation.
According to the Congressional report, in 2015, services as a share of GDP grew to 49.2%, surpassing industry's at 41.9%. This tallies with the Premier's reported increase of services' share to 50.5% of the GDP for the first time. Services will be further promoted in the coming years.
Innovation and private enterprise have registered significant headway. Business startups and innovations flourished, with newly registered businesses rising by 21.6% in 2015, averaging 12,000 new businesses per day. The Made in China 2025 initiative has been introduced to upgrade manufacturing nationwide. By 2020, investment in research and development is expected to reach 2.5% of GDP. The aim is for contribution of scientific and technological advances toward economic growth to reach 60%.
The Premier reiterated the imperative of state-owned-enterprise reform, including "zombie enterprises". SOEs are to have mixed public and private ownership. Some will be transformed into state-owned investment companies (similar to Singapore’s Temasek). Measures are introduced to drastically reduce over-capacity, excessive stock, and over-indebtedness, using instruments such as packaged sale of non-performing loans. At the same time, local government bonds are issued to replace outstanding debt, lessening interest payment burdens. Fiscal, tax, financial, and other key reforms were deepened. Pilot free trade zones were established in Guangdong, Tianjin, and Fujian based on the model of the China (Shanghai) Pilot Free Trade Zone. These are all part of a Supply Side Reform designed to achieve a leaner, more streamlined, higher-quality and more competitive economy.
Vigorous measures are introduced to combat air pollution, cherishing a "beautiful" China Dream of "green hills, clear waters, and blue skies". According to a Roadmap of Chinese Academy of Sciences, fossil energy’s share of the nation’s total energy consumed is expected to decline from 92.7% in 2007 to 45% by 2050, while renewable energy is expected to rise from 6.5% to 45% and nuclear energy from 0.8% to 10% over the same period. (Science and Technology in China: A Roadmap to 2050, Strategic General Report of the Chinese Academy of Sciences, Science Press Beijing, Springer Heidelberg Dordrecht London New York, 2010). As reported by the Brookings Institution, President Xi Jinping, at a high-level meeting in June 2014, called for a sweeping energy revolution in China in five areas: demand, production, technology, institutional governance, and global markets. Among the objectives are energy efficiency, reduced energy intensity, energy sustainability, and reduction of emissions. Over the period 2016-20, water consumption, energy consumption, and carbon dioxide emissions per unit of GDP are to be cut by 23%, 15%, and 18%, respectively, while forest coverage is to reach 23.04%.
By way of Intended Nationally Determined Contribution (INDC) under the COP21 Paris Climate Agreement, China committed, with reference to 2005 levels - (a) to achieve peak carbon dioxide emissions around 2030; (b) to lower emission intensity per unit of GDP by 60-65%; (c) to increase the share of non-fossil fuels in primary energy consumption to around 20%; and (d) to increase forest stock by around 4.5 billion cubic meters. A 20-billion-yuan (about US$3 billion) China South-South Climate Cooperation Fund will be set up to support other developing countries in combating climate change. China's INDC aims to double wind capacity to 200 gigawatts and to more than triple solar capacity to 100 gigawatts by 2020 from 2014 levels. This expansion is supported by the dramatic growth of non-fossil generation capacity over 2010-2014. Solar capacity jumped by 3,161.6% to 28.05 gigawatts, wind capacity by 225.8% to 96.37 gigawatts, nuclear by 83.7% to 19.88 gigawatts, biomass by 72.4% to 9.48 gigawatts, hydro by 39.7% to 301.83 gigawatts, and geothermal by 7.1% to 0.03 gigawatts. Overall, the increase had been 73.3% to 455.64 gigawatts in just four years.
In order to reduce emissions by 40-45% by 2020 relative to 2005, coal consumption is being tightened. A strenuous battle against air pollution and coal usage started a few years back. In September 2013, six ministries jointly launched the Air Pollution Prevention and Control Action Plan in the Beijing-Tianjin-Hebei Region. This requires PM2.5, or “fine particle,” concentrations in the Region to be reduced by 25% from 2012 level. The Region’s total coal consumption is to be reduced by 83 million tons by 2017.
An Environmental Protection Law was enacted effective 1st January 2015, including accumulative fines with no ceiling, provision for law suits by environmental NGOs, and sharpening accountability of local governments. An Environmental Impact Assessment system will be embedded in relevant legislation. A new Air Pollution Prevention and Control Law came into force on 1st January, 2016. Laggard cities are required to publish detailed plans to achieve emission reduction targets with public input and regular updates. Party secretaries are held to account for their green credentials in judging their promotion prospects.
At the 2013 Communist Party’s 18th Central Committee Third Plenum, China decided for markets to play a decisive role in allocating resources. Environmental market instruments include price reforms, subsidies and taxes, and emissions trading schemes (ETS). Seven pilot ETS have been launched over 2013-2014: Shenzhen, Shanghai, Beijing, Guangdong, Tianjin, Hubei, and Chongqing. They apply to energy-intensive sectors covering 35-60% of the total emissions of the respective region and 10% nationwide. These pilots combined make up the second-largest ETS in the world after Europe. They translate into 650 million to 700 million tons of CO2 in 2014, compared with 2.1 billion tons in Europe, 382 million tons in Australia and 165 million tons in California. A national emission trading system (ETS) is expected to be launched in 2017 covering key industry sectors such as iron and steel, power generation, chemicals, building materials, paper-making, and non-ferrous metals.
China is also considering carbon taxes. At the China-U.S. Strategic and Economic Dialogue in July 2013, Finance Minister Lou Jiwei confirmed that China would expand environmental taxes to include carbon in due course.
The share of non-fossil fuels in primary energy consumption is mandated to expand to 15% by 2020 and 20% by 2030. To achieve these targets, a "green dispatch system" is to be implemented in favour of renewable sources in electricity distribution, supported by rapidly growing solar and wind capacities. Clean coal measures, coal caps and coal-free zones are to be introduced while vehicle fuel quality standards are to be enhanced.
Half of China’s energy use today is subject to mandatory efficiency standards. With a national emissions trading scheme expected in 2017, the Chinese economy is on the way towards 85% less energy-intensity compared to the past 25 years. With large-scale deployment of wind, solar, hydro and nuclear power, China’s CO2 emission growth is expected to flatten, to peak around 2030.
To realize the above goals, half a trillion RMB (UD$ 77 billion) has been earmarked to invest in housing, agriculture, rail network in inner provinces, technological upgrading, innovative industries, energy conservation, ecological re-construction, education, healthcare, culture, sports and poverty relief. Some of this investment are prone to misinterpretation as short-term stimulus. Click here However, it is evident that the progress outlined above has not come about as a result of opening the spigots.
On civil society, a new law is introduced to formally recognize and regulate non-government and charitable organizations. Emphasis is also being placed on the Rule of Law and accountable governance. All of the above, along with the anti-corruption campaign, are imperatives to reboot the legitimacy of the Communist Party.
Last year alone, 13.12 million new urban jobs were created amidst difficult economic conditions worldwide. The 13th Five Year Plan (2016-20) calls for a total of 50 million-plus new urban jobs over the next five years. The targets in the new Five Year Plan do not appear over-ambitious compared with those in the preceding Plan (2010-15), which has been successfully achieved. Indeed, successive Five-Year Plans have a consistent record of successful realization.
Implications of the 13th Five Year Plan (2016-20) for the rest of the world would include the following -
- Demand from China for resources is set to slow down further, including steel and other minerals.
- More labor-intensive operations are likely to move offshore.
- Increased demand can be expected for branded consumer goods for China's rising middle-class.
- More capital will be going out to seek investments, under the One Belt, One Road initiative, in countries including Europe with UK poised to be a prime target ( McKinsey & Co - China 2016 )
- More demand for joint ventures in high-technology and green businesses.
Download Full Text of 2016 China Military Reform Commission 2016 中華人民共和國軍委發布軍事改革意見全文
As I said at the TV interview, China's growing military capabilities to defend her territorial claims and integrity are bound to rattle relationships with her neighbors and with the world's current superpower, the United States. No doubt, the relationship between China and the United States is set to define the world order in the 21st century.
All in all, China's Rise is set to present epochal challenges as well as opportunities. In short, it needs to be better understood and carefully managed by all nations.
