Another Five-Year Plan

Story Highlights:

• Since 1953, the Chinese government has established general economic policies and objectives for the country in five-year increments.
• The newly announced Twelfth Five-Year Plan (2011-2015) seems to aim to increase the sustainability, coordination, and balance in Chinese economic development.
• Some main objectives include targeting 7% annual GDP increase over the next five years, containing inflation, and reducing income inequality.
• Political rhetoric no doubt plays a part in the plans—make no mistake, the government will deviate if they have to.
• Rather than embarking on major policy shifts, the Twelfth Five-Year Plan largely continues the direction policy has headed over the last five years.

China’s economic policies contributed to its overtaking Japan as the world’s second largest economy last year. To know what the government has in store for the next five years—and whether China has a prayer of challenging America’s size—a good place to start is the aptly named and newly released Twelfth Five-Year Plan.

Since 1953, the Chinese government has established general economic policies and objectives for the country in five-year increments. The plans have evolved focus over the years, as necessitated by a changing economy. For example, the First Five-Year Plan concentrated efforts on creating the foundations for socialist industrialization, including materials production and infrastructure construction. And some five-year plans were more successful than others—the disastrous Second Five-Year Plan, or the “Great Leap Forward,” ended up being neither great, nor a leap, nor forward. Mao’s communist government didn’t much understand specialization of labor, nor economic incentives, and the result was deadly—tens of millions died due to rotten economic policies.

Fortunately for the Chinese people, their economy, and their trading partners, more recent five-year plans have featured more economic openness. Premier Wen Jiabao just announced the Twelfth Five-Year Plan, spanning 2011 through 2015. The plan generally seems to aim to increase the sustainability, coordination, and balance in economic development as globalization intensifies and China becomes (thankfully) more open. Some main objectives:

• Target 7% annual GDP increase over the next five years,
• Keep overall level of prices stable,
• Increase domestic demand, especially consumer demand,
• Modernize and bolster the agriculture industry,
• Increase urbanization,
• Strengthen energy conservation and environmental protection,
• Raise education levels,
• Increase employment and seek more balanced income distribution,
• Regulate the real estate market to stabilize prices,
• Accelerate the development of the service sector,
• Increase government spending in key economic areas,
• Increase bond and equity financing to decrease dependence on bank lending,
• Increase China’s role internationally, through global trade, expanding the use of the yuan, and encouraging firms to operate internationally,
• Decrease government corruption

Political rhetoric no doubt plays a part in the plans—make no mistake, the government will deviate if they have to. Nor is anyone particularly held accountable if goals aren’t met. The Chinese people don’t really get to “vote the bums out” if, for example, they aren’t happy with the pace of education reforms. Many of the goals in the Twelfth Five-Year Plan are lofty and some are likely meant to appease public and foreign audiences, though the underlying message clearly shows a focus on promoting stable growth. Again, a fine aim, and China normally has greatly exceeded its growth goals in recent years.

The “stable” part remains to be seen—China faces a delicate balancing act in managing inflation since its currency doesn’t now (and likely won’t soon) float freely. Additionally, there is abundant language about increasing social welfare, undoubtedly aimed at boosting consumer demand (and therefore growth), but perhaps more importantly in the immediate term at preventing popular uprisings similar to those seen recently in the Middle East.

Rather than embarking on major policy shifts, the Twelfth Five-Year Plan largely continues the direction policy has headed over the last five years. If the plan is successful, it bodes well for the Chinese economy. Ongoing stable growth also benefits China’s trading partners (i.e., the world). We’re all for the increasing openness implied here. Let’s see if they stick to it—or even hurry it along.