China’s 12 th Five Year Plan & Economic Outlook Prepared for US-China Cross-Border M&A Forum October 2011
China’s 12th Five Year Plan
& Economic Outlook
Prepared for US-China Cross-Border M&A
Forum
October 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
Setting the Context - China’s political system
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
State Council
National People’s Congress
Chinese People’s Political Consultative Congress
The Central Committee of Chinese Communist Party (CCP) and its 9-person
Politburo Standing Committee is the ultimate authority
State Council follows CCP’s guidance to develop and implement policy
NPC is a ‘rubber stamp’ rendering policy into law
CPPCC is vehicle for outreach to non-CCP elements with
influential individuals but no executive or legislative authority
POLITICAL DEVELOPMENT
1949-1978
Focus on class struggle & ideology
Emphasis on state planning and industrial development
Personality cult - Mao as center of power
Class struggle deemphasized
Pragmatism trumps ideology (To get rich is glorious)
Deng as supreme leader, but without personality cult
“Three Represents” justifies market economy
Party legitimacy sustained by economic growth and increased prosperity
Enhanced individual freedoms, but limited political reform
“Harmonious Society” and “Scientific Development Outlook”
Focus on equitable growth
Growing confidence and nationalism
ECONOMIC DEVELOPMENT
Central-planned economy dominated by SOEs and collectives
Administrative orders, quotas and procurement drive China’s economy
Growth, modernization and reform prioritized
Many price controls and quotas removed and greater foreign investment permitted
Coastal areas benefited most from reform
Accession into World Trade Organization
Socialist market-economy principles promoted
State role reduced, SOE dismantling begins
Foreign investment and technology transfer encouraged
Increased globalization
Greater focus on sustainable development
Combating resource inefficiency & environmental degradation prioritized
CENTRAL PLANNING
1978-1994
1994-2003
2003-PRESENT
REFORM AND OPENING UP
CONTINUED REFORM
EQUITABLE DEVELOPMENT
1ST GENERATION—MAO ZEDONG
2ND GENERATION—DENG XIAOPING
3RD GENERATION—JIANG ZEMIN
4TH GENERATION—HU JINTAO
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.
5th GENERATION
China’s Economic Evolution: Reflecting leadership’s vision
Importance of the 12th Five Year Plan
Plan Development
Key Themes
Impact on multinational corporations in China
Five Year Plans Through the Ages
Key industrial planning tool
Important coordinating mechanism even with transition toward market economy
•Fewer numerical targets/quotas
•More sophisticated measurement systems
•More market-based approach
More qualitative than quantitative (计划 to 规划)
Includes environmental & social planning
Implementation remains difficult
Dangers of excess; pressure to meet goals
Does it matter?
China’s key document to achieve
medium-term economic and social policy objectives
A master policy blueprint…
Years 3-5 Revision
Years 4-5 Drafting of Next
FYP
Year 1 (March)
FYP Issued
Years 1-5 Plan
Carried Out
Year 3 Mid-Term Review
… that cyclically structures policy-making
The 12th National Five-Year Plan for Economic and
Social Development
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
and energy policy.
FYP Issuance followed by roll-out of detailed
implementing actions, including related laws,
pricing policies, financial incentives, and
investment support.
The Planning Process: Five-Year Plans
More Players Than Ever Before
Key players in central-level FYP development
Issue basic FYP guidelines
Role
Review and approve final draft
Draw up final draft
Organize intra-governmental
research & drafting; early drafts
Assist in research & drafting
within relevant mandate
Review and provide comment
Non-Government
Consultation process
includes domestic and
foreign experts from
academia and industry.
Consultation process
trending toward greater
transparency and
higher degrees of input
from different levels of
government, experts
and the public.
NDRC
State Council
Departments
National People’s
Congress
State Council
CPC Central Committee
CPPCC
Organization
Extensive consultations within government and with outside experts;
increasingly standardized process
National FYP Broad objectives
Local FYPs Match central-level
objectives
Special Plans State Environmental Protection
Standards for the 12th FYP (Draft for Comment) (Oct. 2010)
Regional Plans Yangtze River Delta Regional Plan
(May 2010)
Medium and Long-Term Plans Medium/Long-Term Renewable Energy Dev. Plan
(to 2020) (Aug. 2007)
Decisions, Programs, etc. State Council Decision on Accelerating the Cultivation and Development of Strategic Emerging Industries (Oct. 2010)
Integrates Central & Local Plans
Coordinated Planning:
Matrix of Central/Local-Level FYPs
• National FYP governs policy
documents at all levels
• Approval from local levels of
government, but plans must conform
to National FYP
• Provincial-level FYPs must also
conform to any relevant Regional FYP
• Special Plans must conform to Special
Plans at higher levels of government
• Extensive vertical and horizontal intra-
governmental consultation in drafting
plans with drafts of subordinate FYPs
often completed before, and feeding
into, the National FYP
• Implementation also coordinated
Findings from local plan fed
into central plans
Local plans must
reflect central goals
Now Official: Ratified by NPC
12th FYP drafting process began in 2008, around 11th FYP mid-term review
Drafting process lasted more than two years
Review & Approval
Drafting
2008 2009 2011 2010
Research
Dec. 2008
11th FYP
mid-term review
Dec. 2009
2nd National
Economic
Census
provides
economic data
for coming FYP
Jan.-Oct. 2010
FYP draft
formulated by
NDRC and
reviewed by
special expert
committee
Oct. 2010
CPC Central
Committee
releases
FYP Guidelines
Nov.-Dec. 2010
NDRC launches
two-month
public comment
period
Nov.-Jan. 2011
State Council
completes
final version of
FYP
Mar. 2011
FYP Outline
Released after
NPC’s
endorsement
Beyond Mar.
Special,
Regional, MLT
plans
formulated and
implemented
across China
Key Themes & Targets
12th FYP (2011-2015)
Restructuring
the
Economy
Promoting
Social
Equality
Protecting
the
Environment
Main Tasks and Strategic Priorities
Key Themes
Gro
wth
rate
Re
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Urb
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/ru
ral d
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Re
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en
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Inco
me
dis
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rity
Sa
ve e
ne
rgy
Cle
an
up
en
viro
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en
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Pro
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ew
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Stra
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Ind
ustrie
s
Key Targets
12th FYP 11th FYP
Annual GDP Growth 7% 7.5%
Annual Service
Sector Increase 4% 3%
GDP Energy
Intensity Reduction 16% 20%
GDP Carbon
Intensity Reduction 17% --
Annual Affordable
Housing Units 36 million --
Annual Urbanization
Increase 4% 4%
Economic Restructuring
• 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 2020
Focus I: Strategic Emerging Industries (SEI)
•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 manufacturers
Focus II: Consumption-led Growth
• Upgrade and consolidate certain industries (esp. highly-polluting industries)
• Promote industry M&As as well as investments in advanced manufacturing equipment and technology
Focus III: Industrial Upgrading
Promoting Social Equality “Inclusive growth” 包容性增长
•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 distribution
Focus I: Urban/Rural Divide
• 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 II: Regional Development
•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)
Focus III: Income Disparity
Environmental Protection & Energy Efficiency Red to Black to Green?
•Support energy-efficiency technology
•Set a national mandatory energy emissions reduction target of 17%
Focus I: Energy Consumption
• 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 pollution
Focus II: Environmental Quality
•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
Focus III: Renewable Energies
Sector Snapshot: Healthcare
Create a modern health care industry with expanded coverage
Health Care System Reform
• Continue broader basic health care coverage
• Expand infrastructure for grassroots medical networks
• Increase public awareness of disease prevention
• Create national health care standards
• Heavy investments in health care IT
Restructure Pharma Sector
• Establish large national pharma champions, with revenues reaching RMB 100 billion
• Consolidate small drug distribution companies
• Reduce drug prices and ensure drug quality
Promote Biotechnology
• Support development of innovative biotech products, high-end medical devices, and patented medicines
• Government funds for R&D of new drugs
• One of the 7 SEI’s
Sector Snapshot: Food & Consumer Products
Expect gains as China shifts to consumption-driven growth
Support Consumption:
Raise minimum wages
Develop logistical and administrative capacity for
movement of goods and services between eastern,
western, and central China
Continue providing subsidies for consumer durables
purchases in rural areas
Encourage urbanization, particularly development of
tier 2 and 3 cities
Promote a Modern Service Industry:
Financial services, including credit cards, leasing,
e-commerce
Wholesale and retail
Hospitality, including hotels and restaurants
Community services, including healthcare
Source: Economist Intelligence Unit
China hopes to increase
consumption by approx 3%
Sector Snapshot: Technology
Transition from “Made in China” to “Designed in China”
Indigenous Innovation
•Heavy investment in S&T
•Strengthen IPR use and protection
•Support commercializa-tion of technology
Informatization
•Upgrade technological capabilities of “triple play” services, e-commerce, e-government and statistics systems
Next-Gen IT
•Develop triple play services, e-commerce and e-government
• Invest in R&D of “Internet of things,” cloud computing, and develop digital and virtual technologies
Education
•Higher education reform
• Improve scientific achievement evaluations and rewards
•Encourage Chinese nationals to return home
Sector Snapshot: Energy and Environment
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.
Maintain coal as dominant energy source, but increase proportion of renewable energy
Economic Outlook
Pessimistic view (e.g., Michael Pettis,
Carnegie)
China's 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
China's 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 Science and Technology (2006-2020)
(State Council, February 2006) Increased overhead costs
Minimum wage hike and value-
added tax increases
Potential environmental taxes
(i.e. environmental insurance
plans and carbon tax)
More complex operating
environment
Development of SEIs, economic
restructuring plans, and income
level reforms will introduce new
regulations and new stakeholders
China’s economic power will
increase; national champions
Government procurement;
expanded service sector
Emerging business opportunities in
tier-two cities in central and western
provinces
Potential collaboration opportunities
with Chinese companies as
government increases investment in
R&D and technological innovation
for joint projects
Stricter government enforcement of
IPR as government seeks to improve
IP legal system and strengthen IPR
creation, application, protection and
management
Challenges Opportunities
Global consultancy started in 1984 in Washington, D.C.
Over 650 staff worldwide across 30 offices
Award-winning experience in public
affairs, strategic communication,
issue management and
organizational positioning and
reputation management
Deep knowledge of highly-regulated
sectors having worked with the
major MNCs and multi-national
organizations across a wide-range
of sectors
20+ years in China
Presence in 4 cities (Beijing,
Shanghai, Guangzhou, Hong Kong)
Over 100 staff members, including
former diplomats, PRC government
officials, business leaders,
journalists and NGO staff
In-depth knowledge of Chinese
government system processes and
politics
Extensive experience helping clients
navigate China’s complex and rapidly
evolving landscape
About APCO Our Presence in China
About APCO Worldwide
4
Key experts
Kenneth Jarrett, chairman of APCO in Greater
China, is based in Shanghai. He has more than
25 years of experience in U.S-Chinese affairs
and previously served as the U.S. consul general
in Shanghai and Deputy Consul General in Hong
Kong. Mr. Jarrett has held a range of
professional positions in the U.S. government in
Asia and the United States.
James McGregor, senior counselor for APCO in
China, is the author of One Billion Customers:
Lessons from the Front Lines of Doing Business
in China. While living in China for more than two
decades, McGregor has been The Wall Street
Journal bureau chief, CEO of Dow Jones China,
a venture capitalist, founder of several
companies and chairman of AmCham-China.
Dr. Ira Kasoff is the former deputy assistant
secretary for Asia at the U.S. Department of
Commerce’s International Trade Administration
(ITA). His extensive experience in Asia spans more
than three decades, having completed six
commercial service assignments in the region, in
addition to private sector and academic
experience.
Greg Gilligan is the managing director of APCO
Worldwide’s Beijing office. Mr. Gilligan joined
APCO after serving as general manager of
corporate affairs for McDonald’s (China) Co.,
Ltd., where he developed and executed
strategies to enhance McDonald's brand and
corporate image among China’s regulatory
bodies, consumers and other key stakeholders.
,
Gao Weijie is former chairman of China Ocean
Shipping Company (COSCO) America and serves
as chairman of the China operation of Lloyd’s
Register Asia. He has more than 42 years of
experience in the shipping, transportation and
logistics industry. With broad experience in
China, Europe and the United States, Mr. Gao
provides expert council to clients navigating
complex trade and regulatory issues in diverse
markets.
Reggie Lai is deputy managing director in APCO
Worldwide’s Shanghai office, is a key member
of the corporate advisory and government
affairs team in China. Mr. Lai carries out
investment consultancy, market research and
government affairs work.
WASHINGTON DC
Ira Kasoff, senior counselor
GREATER CHINA
Kenneth Jarrett, chairman