Sunday, March 20, 2011

Ambitious Five-Year Plan stops growth obsession

China’s 12th Five-Year Plan has received a lot of positive feedback from commentators in China and in the West. One of its main objectives is to reduce growth rates and to create more income equality. This is definitely needed, as growth remains limited to export-oriented business, inflation eats away most of people’s savings and high personal income tax does the rest.

Now the government vowed to wage a war on inflation, which is officially at 4.9% but probably much higher. One of the core instruments to reduce the income gap is a government investment program set to build 10 million affordable homes this year and 36 million units over the period between 2011 and 2015. This and other measures, the government hopes, will allow citizens to keep more of their salary in their pocket. In my view, it is a good idea because next to bringing social peace, it empowers the citizens and allows for more entrepreneurial ideas in the economy (China being a country in which the entrepreneurial spirit is quite well-developed despite its education system). Higher income also provides citizens with more political power in terms of what you may call “voting with your wallet”. In addition, it may well increase the legitimacy of the government, in which people are said to have little trust.

With regard to the environment, the Chinese objectives are remarkably ambitious. Renewable energies will be raised to 11.4% of China's energy consumption by 2015 and 15% by 2020, energy intensity is to be cut by 16% and carbon intensity by 17%. Officially, EU Climate Commissioner Hedegaard is highly delighted about the good news from China. In reality, the EU has to be very careful that China doesn’t overtake it in environmental policy. While the EU is talking about a smart energy grid, China is already implementing it.

However, problems are still apparent. Five-Year Plans passed by the national parliament (NPC) have generally been quite far-sighted; problems appear when it comes to implementing these policies in the provinces, and they concern environmental measures in particular. Many provinces do everything they can to enhance economic growth at the detriment of the environment. For the coming 2011-15 period, the government has lowered overall growth to 7% but 25 provincial regions out of 31 in the Chinese mainland set double digit growth rates. What the focus on economic growth can mean in practice has been highlighted by the film "The Warrior of Qiugang", that tells the story of a villager's fight against a polluting company next door (watch it here). Fearful of losing an investor, the authorities long refused to act in favor of the population. We can only hope that implementation will become better as the standard of living rises and corruption in public administration declines.

But overall it looks as though China wanted to move away from growth and GDP as indicators of progress and turn towards social, environmental and technological aspects. It apparently elaborates a new set of benchmarks including a kind of happiness index. Much remains to be done, as sources indicate that up to 94% feel unhappy given the unequal distribution of income. But if the objectives of the Five-Year Plan can be implemented on a regional and local level all over China, the country is on the best way to become a fully developed country.

To get a better picture of the Chinese economy, you may want to read this excellent report by HSBC.
Update 20/04/2011: Steward Fleming has a more pessimistic take on the Five-Year Plan, saying that "bureaucrats, operating in China's quasi-market system, are proving unequal to the task of slowing growth, curbing inflation, and managing the exchange rate of the yuan".


  1. As far I am concerned, Chinas decision is the right one, but to inforce the change to the single regions, is in my eyes the bigger challenge. Thanks for the movie link.

  2. Dear Tim, yes that remains a big challenge and it will be interesting to observe it further. If you like have a look at the video, I hope you will like it.