China’s 12th Five Year Plan & Economic Outlook - Ira Kasoff
China’s 12th Five Year Plan& Economic OutlookPrepared for US-China Cross-Border M&AForumOctober 2011
Today’s agenda Setting the Context - China’s political system Overview of the 12th Five Year Plan Plan importance Plan Development Key Themes Impact on multinational corporations in China Economic Outlook
China’s Power Structure in Theory Four government organs with power and responsibilities shared between them
China’s Power Structure in Reality:Top-down from the Party Communist Party of China The Central Committee of Chinese Communist Party (CCP) and its 9-person Politburo Standing Committee is the ultimate authority State Council State Council follows CCP’s guidance to develop and implement policy National People’s Congress NPC is a ‘rubber stamp’ rendering policy into law Chinese People’s Political Consultative Congress CPPCC is vehicle for outreach to non-CCP elements with influential individuals but no executive or legislative authority
China’s Economic Evolution: Reflecting leadership’s vision POLITICAL DEVELOPMENT ECONOMIC DEVELOPMENT 1ST GENERATION—MAO ZEDONG 1949-1978 CENTRAL PLANNING Focus on class struggle & ideology Central-planned economy dominated by SOEs and collectives Emphasis on state planning and industrial development Administrative orders, quotas and procurement drive China’s Personality cult - Mao as center of power economy2ND GENERATION—DENG XIAOPING 1978-1994 REFORM AND OPENING UP Class struggle deemphasized Growth, modernization and reform prioritized Pragmatism trumps ideology (To get rich is glorious) Many price controls and quotas removed and greater Deng as supreme leader, but without personality cult foreign investment permitted Coastal areas benefited most from reform 3RD GENERATION—JIANG ZEMIN 1994-2003 CONTINUED REFORM “Three Represents” justifies market economy Accession into World Trade Organization Party legitimacy sustained by economic growth and increased Socialist market-economy principles promoted prosperity State role reduced, SOE dismantling begins Enhanced individual freedoms, but limited political reform Foreign investment and technology transfer encouraged 4TH GENERATION—HU JINTAO 2003-PRESENT EQUITABLE DEVELOPMENT “Harmonious Society” and “Scientific Development Outlook” Increased globalization Focus on equitable growth Greater focus on sustainable development Growing confidence and nationalism Combating resource inefficiency & environmental degradation prioritized 5th GENERATION Two candidates, 54-year-old Xi Jinping and 52-year-old Li Keqiang have emerged as competing candidates to be China’s next generation of leaders. In addition, another six members in their 50s were named to the Politburo and/or the Secretariat. These eight rising stars collectively have formed a “succession team” set to take over as the 5th generation of leaders in 2012-2013.
Importance of the 12th Five Year PlanPlan DevelopmentKey ThemesImpact on multinational corporations in China
Five Year Plans Through the Ages Key industrial planning tool Important coordinating mechanism even with transition toward market economy More qualitative than quantitative (计划 to 规划) •Fewer numerical targets/quotas •More sophisticated measurement systems •More market-based approach Includes environmental & social planning Implementation remains difficult Dangers of excess; pressure to meet goals Does it matter?
The Planning Process: Five-Year Plans China’s key document to achieve medium-term economic and social policy objectives A master policy blueprint… … that cyclically structures policy-making The 12th National Five-Year Plan for Economic and Year 3 Social Development Mid-Term Years 3-5 Review Revision Broad policy objectives for 2011-2015. Largest policy-making event in China. Scope includes wide range of social and economic issues: GDP growth, industry restructuring, healthcare, environmental protection, urbanization Years 1-5 Years 4-5 and energy policy. Plan Drafting Carried of Next FYP Issuance followed by roll-out of detailed Out FYP implementing actions, including related laws, pricing policies, financial incentives, and Year 1 (March) investment support. FYP Issued
More Players Than Ever Before Extensive consultations within government and with outside experts; increasingly standardized processKey players in central-level FYP development Organization Role Non-Government CPC Central Committee Issue basic FYP guidelines Consultation process includes domestic and National People’s foreign experts from Review and approve final draft academia and industry. Congress Consultation process State Council Draw up final draft trending toward greater transparency and Organize intra-governmental higher degrees of input NDRC research & drafting; early drafts from different levels of government, experts State Council Assist in research & drafting and the public. Departments within relevant mandate CPPCC Review and provide comment
Integrates Central & Local Plans Local plans must Findings from local plan fedreflect central goals into central plans National FYP Coordinated Planning: Broad objectives Matrix of Central/Local-Level FYPs Local FYPs • National FYP governs policy Match central-level objectives documents at all levels • Approval from local levels of Special Plans government, but plans must conform State Environmental Protection to National FYP Standards for the 12th FYP (Draft for Comment) (Oct. 2010) • Provincial-level FYPs must also conform to any relevant Regional FYP Regional Plans • Special Plans must conform to Special Yangtze River Delta Regional Plan Plans at higher levels of government (May 2010) • Extensive vertical and horizontal intra- governmental consultation in drafting Medium and Long-Term Plans plans with drafts of subordinate FYPs Medium/Long-Term Renewable Energy Dev. Plan often completed before, and feeding (to 2020) (Aug. 2007) into, the National FYP • Implementation also coordinated Decisions, Programs, etc. State Council Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries (Oct. 2010)
Now Official: Ratified by NPC 12th FYP drafting process began in 2008, around 11 th FYP mid-term review Drafting process lasted more than two years Dec. 2008 Dec. 2009 Jan.-Oct. 2010 Oct. 2010 Nov.-Dec. 2010 Nov.-Jan. 2011 Mar. 2011 Beyond Mar. 11th FYP 2nd National FYP draft CPC Central NDRC launches State Council FYP Outline Special,mid-term review Economic formulated by Committee two-month completes Released after Regional, MLT Census NDRC and releases public comment final version of NPC’s plans provides reviewed by FYP Guidelines period FYP endorsement formulated and economic data special expert implemented for coming FYP committee across China 2008 2009 2010 2011 Research Drafting Review & Approval
Key Themes & Targets 12th FYP (2011-2015) Key Targets Key Themes 12th FYP 11th FYPRestructuring Promoting Protecting Annual GDP Growth 7% 7.5% the Social the Economy Equality Environment Annual Service 4% 3% Sector Increase Main Tasks and Strategic Priorities GDP Energy 16% 20% Intensity Reduction GDP Carbon Clean up environment Promote new energy Regional development Income disparity Save energy Urban /rural divide Strategic Industries Growth rate Rebalancing the economy 17% -- Intensity Reduction Annual Affordable 36 million -- Housing Units Annual Urbanization 4% 4% Increase
Economic RestructuringFocus I: Strategic Emerging Industries (SEI) • Develop 7 SEIs as backbone of Chinese economy: next-generation information technology, high-end equipment manufacturing, new materials, new energy cars, energy saving and environmental protection, alternative energy and biotechnology • Spend RMB 10-14 trillion to develop these industries; increase SEI’s contribution from 5% of GDP to 8% by 2015 and 15% by 2020Focus II: Consumption-led Growth •Upgrade economy from export-oriented to consumption-oriented, innovative growth model •Cancel favorable polices designed to encourage processing trade (eg. export VAT rebates), resulting in shrinking profit margins for low-value-added manufacturersFocus III: Industrial Upgrading • Upgrade and consolidate certain industries (esp. highly-polluting industries) • Promote industry M&As as well as investments in advanced manufacturing equipment and technology
Promoting Social Equality“Inclusive growth” 包容性增长Focus I: Urban/Rural Divide •Reduce urban/rural income gap by: • Increasing urbanization (47.5% to 51.5%) • Increasing social safety net for rural population • Improving basic health care coverage and rural land distributionFocus II: Regional Development • Promote balanced regional development by attracting investments and industrial relocation to China’s central and western provinces through preferential policies including: • Industry-specific regional development plans • Establishing Liangjiang New District in Chongqing which offers same incentives found in Shanghai’s Pudong New District and Tianjin’s Binhai Development Zone, including 15% EIT • Regional development incentives (reduced EIT)Focus III: Income Disparity •Increase minimum wages and standards of living • More public housing • Beijing government has announced plans to increase minimum wages by 40% by 2015 • CPPCC Vice Chairman Huang Mengfu says should increase 20%/yr for next five years (Sept 2010)
Environmental Protection & Energy EfficiencyRed to Black to Green?Focus I: Energy Consumption •Support energy-efficiency technology •Set a national mandatory energy emissions reduction target of 17%Focus II: Environmental Quality • Consider linking green indicators to accountability of local government officials to encourage green development • Consider introduction of new carbon tax and other environmental taxes and policies such as increased fossil fuel prices and carbon-trading market • Promote water conservation projects: improve efficiency of usage, limit scale of water exploitation, curb water pollutionFocus III: Renewable Energies •Comply with China’s pledge, namely, 15% of energy coming from non-fossil fuels by 2020 •Cap coal production and support development of wind, solar, biomass, hydro and nuclear energies •Increase government funding: $700-800 billion from $181 billion in 11th FYP
Sector Snapshot: Healthcare Create a modern health care industry with expanded coverage Health Care System Restructure Promote Reform Pharma Sector Biotechnology• Continue broader • Establish large • Support development basic health care national pharma of innovative biotech coverage champions, with products, high-end• Expand infrastructure revenues reaching medical devices, and for grassroots medical RMB 100 billion patented medicines networks• Increase public • Consolidate small drug • Government funds for awareness of disease distribution companies R&D of new drugs prevention• Create national health • Reduce drug prices • One of the 7 SEI’s care standards and ensure drug• Heavy investments in quality health care IT
Sector Snapshot: Food & Consumer Products Expect gains as China shifts to consumption-driven growthSupport Consumption:Raise minimum wagesDevelop logistical and administrative capacity formovement of goods and services between eastern,western, and central ChinaContinue providing subsidies for consumer durablespurchases in rural areasEncourage urbanization, particularly development oftier 2 and 3 citiesPromote a Modern Service Industry:Financial services, including credit cards, leasing, Source: Economist Intelligence Unite-commerce China hopes to increaseWholesale and retail consumption by approx 3%Hospitality, including hotels and restaurantsCommunity services, including healthcare
Sector Snapshot: Technology Transition from “Made in China” to “Designed in China” Indigenous Innovation Informatization Next-Gen IT Education•Heavy •Upgrade •Develop triple •Higher investment in technological play services, e- education S&T capabilities of commerce and reform•Strengthen IPR “triple play” e-government •Improve use and services, e- •Invest in R&D of scientific protection commerce, e- “Internet of achievement•Support government things,” cloud evaluations and commercializa- and statistics computing, and rewards tion of systems develop digital •Encourage technology and virtual Chinese technologies nationals to return home
Sector Snapshot: Energy and EnvironmentMaintain coal as dominant energy source, but increase proportion of renewable energy Continue consolidating coal mining companies: 8 to 10 coal companies will account for two-thirds of coal production by 2015. Structure new energy policies around hydro and nuclear power: an additional 14 nuclear power plants and 50% increase in hydropower capacity by 2015. Three of seven SEIs devoted to energy and environment sectors: “Energy Efficiency and Environment,” “New Energy” and “New Energy Vehicles.” Further development of power grid and smart grid: State Grid’s investments will exceed RMB 17 billion during this period.
Pessimistic view (e.g., Michael Pettis,Carnegie) Chinas growth based on large increases in government-directed investment. Chinese households consume only about 35% of GDP, far less than any other country. Must rebalance away from investment and toward domestic consumption To raise consumption to 50% of GDP, household consumption would need to grow four percentage points faster than GDP In the past decade, Chinese household consumption has grown by 7% - 8% annually, while GDP has grown 10% - 11%. If GDP grows by 6% - 7%, household consumption would have to surge by 10% - 11% powerful structural factors working against this level of growth in consumption And, Chinese GDP numbers are overstated
Optimistic view (e.g., Yukon Huang,Carnegie) Many point to China’s low consumption-to-GDP ratio at 35% and a high investment-to-GDP ratio that exceeds 45%. Few pause to notice that these numbers, especially in consumption, are inconsistent with market perceptions. Domestic consumption is seriously understated Estimates of the share of investment in GDP are too high Chinas GDP—like consumption—is likely much higher than reported.
Practical view (e.g., David Barboza, NYT) Economic system favors state-run banks and companies over wage earners. interest rates on savings accounts kept artificially low, cannot keep pace with China’s rising inflation Other factors— a weak social safety net, depressed wages and soaring home prices — create a hoarding impulse that compels many people to save anyway, against an uncertain future. Decade of remarkable economic growth has been underwritten by the household savings — not the spending — of the country’s 1.3 billion people (transfer of wealth from Chinese households to state-run banks) Middle-class families are unable to enjoy the full fruits of China’s economic miracle.
Significance for Foreign Business The Medium to Long-Term Plan for Challenges Science and Technology (2006-2020) Opportunities (State Council, February 2006) Increased overhead costs Government procurement; Minimum wage hike and value- expanded service sector added tax increases Emerging business opportunities in Potential environmental taxes tier-two cities in central and western (i.e. environmental insurance provinces plans and carbon tax) Potential collaboration opportunities More complex operating with Chinese companies as environment government increases investment in R&D and technological innovation Development of SEIs, economic for joint projects restructuring plans, and income level reforms will introduce new Stricter government enforcement of regulations and new stakeholders IPR as government seeks to improve IP legal system and strengthen IPR China’s economic power will creation, application, protection and increase; national champions management
About APCO WorldwideAbout APCO Our Presence in China Global consultancy started in 1984 20+ years in China in Washington, D.C. Presence in 4 cities (Beijing, Over 650 staff worldwide across 30 Shanghai, Guangzhou, Hong Kong) offices Over 100 staff members, including Award-winning experience in public former diplomats, PRC government affairs, strategic communication, officials, business leaders, issue management and journalists and NGO staff organizational positioning and reputation management In-depth knowledge of Chinese government system processes and Deep knowledge of highly-regulated politics sectors having worked with the major MNCs and multi-national Extensive experience helping clients organizations across a wide-range navigate China’s complex and rapidly of sectors evolving landscape 4
Key experts Kenneth Jarrett, chairman of APCO in Greater Dr. Ira Kasoff is the former deputy assistant China, is based in Shanghai. He has more than secretary for Asia at the U.S. Department of 25 years of experience in U.S-Chinese affairs Commerce’s International Trade Administration and previously served as the U.S. consul general (ITA). His extensive experience in Asia spans more in Shanghai and Deputy Consul General in Hong than three decades, having completed six Kong. Mr. Jarrett has held a range of commercial service assignments in the region, in professional positions in the U.S. government in addition to private sector and academic Asia and the United States. experience. James McGregor, senior counselor for APCO in Greg Gilligan is the managing director of APCO China, is the author of One Billion Customers: Worldwide’s Beijing office. Mr. Gilligan joined Lessons from the Front Lines of Doing Business APCO after serving as general manager of in China. While living in China for more than two corporate affairs for McDonald’s (China) Co., decades, McGregor has been The Wall Street Ltd., where he developed and executed Journal bureau chief, CEO of Dow Jones China, strategies to enhance McDonalds brand and a venture capitalist, founder of several corporate image among China’s regulatory companies and chairman of AmCham-China. bodies, consumers and other key stakeholders. , Gao Weijie is former chairman of China Ocean Reggie Lai is deputy managing director in APCO Shipping Company (COSCO) America and serves Worldwide’s Shanghai office, is a key member as chairman of the China operation of Lloyd’s of the corporate advisory and government Register Asia. He has more than 42 years of affairs team in China. Mr. Lai carries out experience in the shipping, transportation and investment consultancy, market research and logistics industry. With broad experience in government affairs work. China, Europe and the United States, Mr. Gao provides expert council to clients navigating complex trade and regulatory issues in diverse markets.
WASHINGTON DC GREATER CHINAIra Kasoff, senior counselor Kenneth Jarrett, firstname.lastname@example.org email@example.com