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China - 12th Five-Year Plan 2011-2015

Released in March 2011, China's 12th Five-Year Plan (FYP), which governed the period from 2011 to 2015, sought to make scientific development a primary objective, strengthen strategic emerging industries, and build up infrastructure. These areas of focus provide a layout for future, large-scale government investments and indicate which industries will receive preferential government support.

The 12th FYP attempted to restructure the Chinese economy by encouraging domestic consumption, developing the service sector, shifting to higher value-added manufacturing, conserving energy, and cleaning up the environment. Three key aspects of the 12th FYP‘s industrial policy are (1) a focus on scientific development, (2) government support for seven strategic emerging industries, and (3) construction of transportation and energy infrastructure. However, some business leaders and academic experts were skeptical that the 12th FYP would solve China‘s structural problems, primarily due to the misalignment of central and local government priorities.

The emphasis of both the 11th and 12th FYPs shifted from enumerating hard production targets to describing broader principles. For example, the infrastructure projects and scientific development targets laid out in the 12th FYP are directed at achieving long-term, steady and relatively rapid economic development (jingji changqi pingwen jiaokuai fazhan). Both the 11th and 12th FYPs placed a high priority on improving their citizens‘ overall well-being throughwage increases, education opportunities, and healthcare.5 While the 11th and 12th FYPs include clear industrial goals and policies, they had fewer numerical production targets than earlier fiveyear plans and rely more heavily on market mechanisms to achieve these industrial goals.

The 12th FYP is distinctive in its heightened focus on economic restructuring, the environment and energy efficiency, and scientific development. Differences between key targets and how these key targets are categorized in the 11th and 12th FYP reflect changing government priorities. These indicators reveal that the 12th FYP places greater emphasis upon economic development versus simply growth, scientific education, and improving overall welfare. The 12th FYP also places a greater emphasis than the 11th FYP on expanding domestic demand. Underscoring this focus on domestic consumption, on March 5, 2011, Premier Wen Jiabao delivered his annual Government Work Report (organized around the key themes of the 12th FYP) and separately listed the expansion of domestic demand as a key aspect of the government‘s work in 2011. These changes signify a critical shift in government priorities because the career progressions of local officials are tied to meeting these goals.

The 12th FYP designates seven strategic emerging industries (SEI) as the drivers for China‘s future economic development from low-end manufacturing to higher-value industries and creating sustainable growth. These industries include clean energy technology; next-generation information technology (IT); biotechnology; high-end equipment manufacturing; alternative energy; new materials; and clean energy vehicles. Four of these industries (biotechnology, high-end equipment manufacturing, new materials, and next-generation IT) were previously identified as target industries in the 11th FYP.

China’s Twelfth Five-Year Plan pushed forward the country’s goals of improving domestic solar R&D, supply-chain production, and project deployment. In greater detail than any previous five-year plan, and it articulated specific R&D goals across the entire solar value chain, from materials, to cells and modules, to systems, to the tooling used in manufacturing. The plan also laid out ambitious deployment goals. It targeted 21,000 megawatts of cumulative solar deployment — including 10,000 megawatts of distributed solar — in China by 2015. In addition, for the whole gamut of solar technologies, from silicon-based to thin-film to emerging technologies to concentrated solar, the Twelfth Five-Year Plan laid out specific goals both for cell efficiency and for pilot-line production. Not content to goad the creation of prototype solar cells, China’s government also pressed companies and government-affiliated solar-research institutions to figure out how to begin scaling up production of those cells.

Since 2000, Chinese government industrial and trade policies produced a dramatic increase in the size of the Chinese steel industry, to the point that it today represents almost half of all global steel production. Chinese crude steel production soared from 128 million MT in 2000 to 823 million metric tons (MT) in 2014 – an increase of 695 million MT – before declining slightly to 804 million MT in 2015. For many years Chinese steel consumption was increasing, and in recent years a significant portion of China’s excess steel production was absorbed by the Chinese government’s stimulus spending on fixed asset investment. But Chinese steel demand appears to have peaked in 2013. With China’s domestic steel demand declining, the Chinese steel industry increasingly relied on exports to consume surplus production. China exported a record 94 million MT of steel products in 2014, an increase of 52 percent from 2013. That trend accelerated in 2015 with Chinese steel exports rising to 112 million MT, an amount big enough to feed demand in Germany and Japan for a year and leave almost 9 million metric tons to spare.

The Chinese economy was decelerating. Based on China’s official statistics, GDP growth slowed in the first half of 2015 to 7 percent, in line with the official target, from an average of nearly 9 percent from 2009 to 2014. Third-quarter GDP data released last month indicate that the economy grew at 6.9 percent year-on-year, slightly below the government’s target and at its slowest pace since 2009. President Xi signaled that China will accept somewhat slower growth of around 6.5 percent over the next five years. Weakening industrial production, corporate profits, and purchasing managers’ indexes all indicate that the deceleration in manufacturing has been considerable. At the same time, growth is holding up much better in more service-oriented areas; and services continue to make the largest contribution to GDP growth, a trend that began in 2011.

Weakening industrial production, corporate profits, and purchasing managers’ indexes all indicate that the deceleration in manufacturing has been considerable. At the same time, growth was holding up much better in more service-oriented areas; and services continue to make the largest contribution to GDP growth, a trend that began in 2011.

Two reforms central to China’s successful transition and economic performance are financial sector reform and SOE reform. China has been making good progress to broaden financing channels to the real economy, and announced significant progress on interest rate liberalization by lifting the cap on deposit rates. This was the last remaining official obstacle to liberalizing interest rates in the banking sector. The deposit rate cap constrained rebalancing by subsidizing low lending rates to unproductive and capital-intensive sectors of the economy. It also effectively taxed households, which are large net savers. By liberalizing deposit rates, the Chinese financial sector is more likely to allocate credit to productive uses.

On SOE reform, the failure to restructure or, if necessary, to shutter unprofitable and overleveraged SOEs, could potentially deprive productive and growing sectors of the economy of the resources necessary to support their expansion. Inability or lack of willingness to address the related issues of industrial overcapacity and debt overhang could also drag down growth in the medium-term, and have further spillover effects on the global economy.

Although the 12th FYP called for economic restructuring and a preference for quality growth over growth at any cost, it was unclear whether the provinces really understood or appreciated this. For example, despite the 12th FYP‘s call for a reduction in projected GDP growth, every province and major city have growth goals that exceed the lower seven percent target. Shanghai‘s 12th FYP posits eight percent growth, and several provinces already have announced growth targets of 13 percent or higher. Therefore, a critical disconnect remained between central government planners and the local governments responsible for implementing the 12th FYP.