What China's Five-Year Plan Says About The State Of The Country's Economy

What's going well, what's not, and where to from here are the hot topics of conversation in China this week at the National People's Congress.

Every five years, the government reviews the progress of the past five-year economic plan, and debates and affirms the plan for the next five years.

In three separate reports delivered to the entire Congress of about three thousand representatives, the government leadership establishes the broad outlines of the budget and its economic priorities (PDF).

This time around, the five-year work plan (PDF) is striking for several reasons: the high degree of continuity from five years ago, the push by Beijing for Chinese companies to assert themselves globally, the strong hand of the state in areas of the economy considered integral to social stability, and the potential for serious debate over several of the redistributive aspects of the plan.

China now ranks as the world's largest consumer of energy, largest exporter, and second largest economy. How the government balances its economic and social priorities, as well as its success in meeting stated targets for economic growth and energy consumption, has enormous implications for the rest of the world.

Despite some Western media commentary proclaiming new growth and energy targets, key numbers presented in the 2011 plan are virtually identical to those in the 2006 plan. The 2006 plan targeted annual GDP growth at 7 percent; the 2011 plan sets out a planned growth rate of 7.5 -8 percent. Given that GDP grew at an annual rate of 9 percent or more throughout 2006-2010, the real significance of such targets is unclear. The government also has announced plans to reduce energy intensity (the amount of energy consumed per unit of GDP) by 16 percent over the next five years; the 2006 five-year target was a reduction of 20 percent, which the government reportedly narrowly missed.  Other five-year priorities from 2006 that remain at the top of the government work plan include: balancing regional development, building a stronger social welfare net, enhancing the conditions for independent innovation, advancing the use of clean energy, and protecting the environment.

The work plan is more noteworthy as a guideline to the government's investment priorities for the next five years. Top areas include agriculture, culture, energy conservation, and regional aircraft. There is also a focus on anything related to advanced technology, such as national broadband, cloud computing, flat panel displays, space infrastructure, and what's called the Internet of Things, which is a move to link all objects to the web through embedded chips.

For the international community, Beijing plans to revise the list of key industries for foreign investment. Not surprisingly, it will push multinationals to develop areas in which China itself remains weak, such as establishing research and development centers, high-end manufacturing, the high-tech industry, and investment in the central and western regions. Many in the international community concerned about Beijing's role in fostering financial imbalances will be pleased to see "expanding domestic demand," as a priority, suggesting the potential to realize long- awaited opportunities to exploit the Chinese market. Less satisfactory will be the government's continued protectiveness over its service sector, noting that it should be opened, but only "prudently."

Moreover, competition will be the name of the game. The reports suggest a renewed and expanded emphasis on making Chinese companies competitive internationally by expanding the role of mergers and acquisitions, developing Chinese brands, and promoting the use of the Chinese currency in cross-border trade.

The five-year work plan also indicates the extended reach of the state in certain aspects of the economy related to social stability, such as inflation, public opinion, and the food supply. To help keep food prices stable, for example, the work plan outlines moves to "standardize and reduce the rent of stalls at farmer and produce markets, as well as supermarket slotting fees." Anyone who "maliciously" drives up prices by "fabricating stories" will be punished.

What's most interesting, perhaps, is the insight the report provides into where the government believes serious challenges remain. The work plan highlights concerns over resource and environment constraints, the size of the population, the poor conditions for innovation, the pace and nature of urbanization, and a lagging service sector as threats to balanced growth. The discussion of the need for clean government is particularly detailed, including calls for officials to report not only their incomes but also what their spouses and children do and whether they live abroad. In addition, the work plan calls for an increase in individual taxes.

With the NPC home to at least seventy of the country's wealthiest people (their combined assets total US$75 billion), debate over several of these clean government and income redistribution efforts is already underway. As one NPC billionaire argued to Bloomberg News, extensive welfare benefits and taxes "sap the energy of entrepreneurs." Property taxes and income reporting requirements are also hot button items for many of China's wealthiest NPC members. After the next ten days of debate, one thing seems certain: We'll have a much better idea of who really holds power in the Chinese government.