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VOL.3 April 2011
China Econometer

Economic Planning in China

China has officially adopted its 12th Five-Year Plan, which outlines a framework for economic planning in the next five years. The plan is the clearest indication yet of China's tilt toward a more consumerist, less polluted and ultimately more balanced society. Full implementation of the plan will be easier said than done, yet the underlying direction of China's economy is clear.

The National People's Congress (NPC), China's top legislature, concluded its annual session in mid-March, with the adoption of China's 12th Five-Year Plan (FYP), covering the period 2011-15. The direction of economic planning in China, partly inspired by the imposing economic realities of recent years (i.e. global financial crisis, long-running inflation, overheating economy – to simplify a complex situation), has transformed the 12th FYP into an evolutionary force for China's economy. One perspective on the 12th FYP is that it is, on paper at least, the most humanist FYP yet: It puts people at the center of economic growth. The 12th instalment is the second under China's fourth generation leadership of Hu Jintao and Wen Jiabao, and is likewise the second FYP that enshrines a vision of economic growth that de-emphasizes the "growth first" policies of earlier decades while emphasizing more controlled and balanced growth with greater protection of the environment.

In his annual Work Report speech at the NPC legislature, Premier Wen Jiabao talked at length about the issues that the government has not yet fundamentally resolved. These include a lack of high-quality educational and medical resources and their uneven distribution; inflation; rapidly increasing house prices; social problems resulting from urban demolition and development; joblessness among young graduates; problems concerning food safety; and corruption.

Yet added to these issues are statements that Premier Wen have made throughout the last few years that clearly outlined his views about the imbalanced and unsustainable structure of China's economy, which has been prone to overheating and widening income inequalities. A guiding principle of current economic planning, Premier Wen stated, was "the need to put people first, making the improvement of their well-being the starting point and goal of all our work."

In economic terms, what Premier Wen would like to see happen in the period of the 12th FYP is for average Chinese people to earn more and to consume more. This would raise living standards in China, and would also increase Chinese imports, which would be a good thing for China's sometimes strained relations with its major trading partners.

Just around the time the Premier was making his speech, it was announced that in February China had actually recorded a trade deficit of $7.3 billion, the largest (of very rare) deficits in recent years. Imports climbed 19.4 percent year on year to $104 billion (see Chart 1), while exports increased only 2.4 percent to $96.7 billion (see Chart 2). Analysts were quick to attribute the drop in exports to the February holiday period in China (in March 2010 China had also registered a trade deficit of over $7 billion), yet underlying consumption and inflation trends in China do suggest that China's large trade surplus will steadily shrink through 2011. As the world's largest user and buyer of commodities, the trade surplus will feel the impact of rising commodity prices, which are up around 20-30 percent year on year (see Chart 3, Thomson Reuters/Jefferies Commodity Index) and are expected to keep rising in 2011.

China will in all likelihood target an annual GDP growth rate of around 7 percent during the next five years. Such a rate would be slow enough so as not to cause the economy to overheat, yet fast enough to foster the creation of new wealth and jobs. Yet the situation is complicated somewhat by vast differences in the pace of growth between regions. At the conclusion of the annual sessions of China's provincial legislatures in January 2011, the central and western provinces set growth targets of around 15 percent, planning to double their GDP in five years. More developed places like Beijing, Shanghai and Guangdong, on the other hand, declared growth targets of less than 9 percent.

China might thus find it difficult to constrain rapid economic growth, rampant house prices and inflation, yet the imperative for doing just this is clearly appreciated in China's government, and if successful, the 12th FYP will see a richer, more balanced and more equitable China in the next five years.

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