The 11th Five-Year Plan covers a major historical period in the socioeconomic development of China. It is a time of many contradictions and risks, for it is regarded as both a “golden age of development” and an “age fraught with contradictions”. If proper strategic choices are made, these opportunities may be grasped with great benefits. Otherwise, development will be delayed with a heavy cost.

By Research Team, Academy of Macroeconomic Research (SDPC)

The international environment during the 11th Five-Year
Plan period and its impact on China

1. The international environment is generally conducive to China’s reform and opening-up process and its modernization drive
Profound and complex changes have taken place in the international environment since the beginning of the new century, particularly after the “9.ll” incident. Political multi-polarization is growing. Unilateralism and multilateralism are locked in struggle. Traditional threats to safety mingle with nontraditional threats. Anti-terrorism coalitions and anti-hegemonism are conditioning each other. The scramble between big powers for strategic regions, resources and domination is intensifying. These factors, which give great impetus for regrouping international relations, allow more room for maneuvering and expansion of China’s international influence, and for concentrating our efforts on speeding up the reform and opening-up process, and the modernization drive. Our relationship has improved with neighboring countries and positive progress has been made in establishing a framework for regional cooperation. That helps to consolidate China’s position in handling regional affairs, and by relying on a better regional cooperation, to strengthen China’s power to participate in global affairs. On the other hand, as a developing socialist country, China is also under the pressure of international power politics, hegemonism, and ideological struggle. As China’s economy grows rapidly, and its international influence rises steadily, the competitors, while actively seeking cooperation with us, are also on guard against us and trying to contain us. As a result, national security becomes an even more sensitive issue. Therefore, we must attach strategic importance to this situation.
2. Globalization enables China to make better use of its comparative advantages and be more deeply involved in the world division of labor

With its economy surging and its market expanding steadily, China is no longer passively accepting the changing international economic environment in the process of globalization. The Chinese economy itself is having a major impact on the global economic situation. According to international sources, in 2004 China’s contribution to the growth of the world economy was 18.2%, and its contribution to the growth of international trade reached 16%. The massive demand for imports caused by the rapid growth of the Chinese economy has become a major driving force behind the growth in the economy and exports of peripheral countries. At the same time, as a developing country, China is still at a disadvantage in terms of the overall economic and technological foundation and competitiveness, and it is under the pressure of developed countries that hold the upper hand in science and technology and in economic prowess. In recent years, competition from Russia, India, Brazil and some other rising large developing countries has also affected China’s efforts in upgrading relations with developed countries. China will have more and more competitors in the world, in more fields and at a higher level.

3. The new hi-tech revolution offers strategic opportunities for increasing China’s status in the international industrial division of work
 The new hi-tech revolution is promoting global industrial restructuring and catalyzing profound changes in the global market structure. Transnational corporations will keep transferring traditional manufacturing industries, and labor-intensive production in the high-tech industry and the service industry, turning China into a global exporting centre of manufactured products and consumer goods. The changing international industrial division of labor is conducive for China to open up new space for economic growth and gain a partial advantage in the global division of labor. Meanwhile, China is confronted with a growing market and resources pressure in international competition. The rapid improvements in commodity production and service abilities around the world will intensify the scramble for market share. The importance of petroleum-centered strategic resources for economic growth and security is increasing. The strategic competition among countries for securing energy supplies will become even more intense. With the robust economic growth and increased consumption, but inadequate per-capita resource reserves, there is an increasing degree of China’s dependence on importing of resources from outside. China has to make strategic arrangements at an early date to cope with the situation.

4. The recovery of world economy is generally conducive for China to ease its constraints from domestic market and demands

Among the major factors contributing to economic growth is an expanding market due to globalization, growing productivity resulting from progress in science and technology, and enhanced adaptability of economies resulting from economic restructuring. Generally speaking, the world economy has ended a three-year period of economic slowdown, and entered a new round of growth. According to the latest IMF prognosis, the world economy will grow by 4.3% in 2005, 4.4% in 2006, and an average of 4.3% in the period 2007-2010. The international trade and transnational direct investment will gradually recover and return to normal status, after nearly two years of decline or stalemate. According to IMF forecasts, the volume of international trade will go up by 7.4% in 2005 and 7.6% in 2006, whereas annual growth rate will average 6.9% during the 2007-2010 period. The UNCTAD predicts that global transnational direct investment, which has rebounded from an all-time low, will continue to increase in the next few years. These factors are generally conducive to China’s growths in imports and direct foreign investment, and to its economic growth. However, protectionism in international trade will continue to curb China’s exports. China will be more dependent on the international market for energy sources, raw materials and other resource-based products, and it will be more influenced by fluctuations in supply-and-demand relationship and prices on the world market. Bright prospects for the world economy notwithstanding, there are many uncertainties. China must continue expanding internal domestic demand to avoid the adverse impact of a possible downturn in the international economic situation.

Periodical characteristics of socioeconomic
development in China

1.  Industrialization begins to shift towards a period of in-depth processing
The industrial added value in the Chinese GDP went up by 2.4 percentage points from 43.6% in 2000 to 46% in 2004. The portion of heavy industry in this added value increased by 5.1 percentage points from 62.5% in 2000 to 67.6% in 2004. The llth Five-Year Plan calls for a larger share of industry in the national economy and for an industrial growth rate that will be slightly higher than the GDP growth rate, so that it will enter a period of stability after 2010. It is expected that the percentage of secondary industry will reach a peak around 2010 and then it will decrease gradually, so that by 2020, the portion of added value of the primary industry in the GP will drop to 10%, that of secondary industry to 45%, and that of tertiary industry grow to 45%. In the industrialization process, the upgrading of residents’ consumption structure since the late 1990s will continue to drive up the growth of heavy industry (represented by the iron and steel, building materials, a utomobile, machinery, nonferrous metal production). On the other hand, the upgrading of equipment for the manufacturing and service industries will be accelerated, increasing the degree of capital- and technology-intensity, and industrialization will start its transition towards a period of in-depth processing. During the 11th Five-Year Plan period, China’s industrialization will see expansion in both its general scale and its percentages in the overall economy. It means “heavy and chemical industrialization” and “ in-depth processing” in terms of structure, or the coexistence of the traditional and new modes of industrialization. Both of these call for more arduous and complex restructuring and transition efforts. In the meantime, the market scale and capacity in the new round of industrialization, and the world environment are so different from what they were during the 1950s, when high priority was given to the development of heavy industry. They are also different from the mid-1980s, when emphasis was on construction of basic industries and infrastructure. The current round of industrialization will be confronted with tougher energy, resource and environmental restraints, and serious competition from the world market. That is why during the 11th Five-Year Plan period, industrialization of China will begin a shift towards a period of in-depth processing. In that way, with structural upgrading aimed at promoting industrial technological advances and raising the industry’s international competitiveness, the nation can markedly improve the overall quality of its industry. Increased contributions to sci-tech progress, with conc,omitant modernization of all the production elements, will quicken hi-tech growth, promote information industry, and speed up the periodical transition of industrialization.

2. Urbanization continues to develop fast, with production elements gathering in big cities

China adopted its urbanization strategy during the 10th Five-Year Plan period, and raised the nation’s urbanization rate from 36.2% in 2000 to 41.8% in 2004. Despite a large population base, the Chinese urbanization rate will keep an annual growth of 1.0-1.3 percentage points during the 11th Five-Year Plan period, so that it will reach 48-50% by 2010, and 55-60% by 2020. Urbanization is bound to trigger a large-scale migration of the rural population to cities, creating beneficial conditions for a change in the urban-rural dual structure. The gravitation of production elements to cities will bring about a tremendous demand for investment in the urban infrastructure, and the growing urban population will boost the demand on the consumer market.
The urbanization process will also aggravate the imbalance in regional development, cause excessive investment in and expansion of cities, disorder in urban development, failure of employment and public services to catch up with the development needs, and also acute supply-and-demand conflicts in land, energy, transportation, and eco-environmental degradation.

3. The degree of all production elements to be decided by the market force will continue to grow, but reform remains a tough task.

China has made new progress in market economy, and established a fundamental socialist market economic system during the 10th Five-Year Plan period. However, this system is not yet full-fledged, and its mainstays – such as a modern property rights system, the credit system and the social security system — are still weak. Breakthroughs are yet to be achieved in certain areas, such as the transition of the government position and function in the market economy. As the reform goes deeper, it will inevitably involve readjustment of interests, infringe upon established interests of certain groups, and encounter more obstacles. Diversification of interest entities will make it more difficult to reach consensuses. Just as the Decision of the 4th Plenary Session of the 16th Central Party Committee pointed out, “The economic restructuring in China is still in a period of tackling tough issues.” This calls for participation at all levels of government, extensive public participation, and a system whereby all members of society fairly participate in and share the benefits of the reforms. In this process, great efforts need to be made to avoid accumulation and intensification of various social confilicts.

4. The level of economic internationalization continues to rise, but the pressure and risks of international competition will increase as well

Following its accession to WTO, China has maintained an unusual growth rate in international trade. In 2004, with its total volume of imports and exports amounting to 1154.74 billion dollars, it became the third largest trading country after the United States and Germany, as well as the third country in the world to have its merchandize trade exceed 1000 billion dollars. Imports and exports accounted for 70% of the GDP. A remarkable increase in foreign investment is one of the major factors behind the robust growth in China’s foreign trade. Direct foreign investment in China reached 46.88 billion, 52.74 billion, 53.51 billion, and 60.63 billion dollars respectively in the first four years of the 10th Five-Year Plan period. Although China’s aggregate economic volume makes up a meager 4 % in the world’s total, its increased volume accounts for 14% of the world total. This has turned the Chinese economy into a major engine for the growth of the world economy, and enables it to foster a stronger interaction relationship with the world economy.
During the 11th Five-Year Plan period, the internationalization of the Chinese economy will continue to rise, but competition pressure and risks will grow as well. China will be confronted with more trade frictions and disputes arising from rapid expansion of exports, and more economic and commercial risks in economic and technical cooperation, and in development and utilization of resources. Factors of instability in regional and global economic politics spell hidden threats to national economic security. China has maintained a high-speed growth in foreign trade, but its international competitiveness is still weak, because its growth in exports is heavily dependent on quantitative increases. The percentage of the processing trade is too high, and percentage of products with Chinese ownership of property rights and brand names and with high added value is too low.  Utilization of foreign investment is still disjointed with domestic industrial restructure and efforts to enhance the nation’s own innovation abilities. China must foster a global strategic vision, and coordinate the relationship between domestic economic development and the opening up to the outside world, achieve a balance between the national economy and the foreign economic relations, and enhance its ability in managing its economy in an openning environment. China must make good use of both domestic and foreign markets and resources. China must also be able to quicken domestic economic restructuring by boosting foreign trade, improve foreign trade in conjunction with efforts to give full play to its comparative strengths, and enhance its innovation capacities. An edge must be cultivated in more industrial fields, to increase overall international competitiveness. China also has to implement a “go international” strategy to deepen regional economic cooperation, improve its trade environment, and effectively guard against risks in world economy.

5. With the changes in people’s lifestyle and social structure,social relations based on personal interest are becoming more complex and diversified

During the 11th Five-Year Plan period, China will continue to build a better-off society in an all-round way, and its social consumer structure and lifestyle will also keep changing. The public will have higher expectations for socioeconomic development than ever before.. On the one hand, we must satisfy people’s demands for better housing and more convenient public transportation, pay more attention to developing human resources, encourage more investment in human resources, enhance the government’s function in public service and social management,and increase input in social undertakings for public welfare.  Effective measures need to be taken to solve problems of unemployment, poverty, social security, education, public health, and income distribution. On the other hand, government should use the power entrusted by the people to increase employment, develop social security undertakings, readjust income distribution, and provide an equitable, democratic and safe legislative environment for all social strata - including those underprivileged.
To sum up, the 11th Five-Year Plan will be in a pivotal period for reform and development. It will be a period of interactions between economic and social restructuring and the drive for reform, a period of the surfacing of the hidden contradictions accumulated in the course of years of quick economic growth, a period of intensifying conflicts of interests, and the growing contradictions between socioeconomic development and the pressure from population, resources and environment. It is also a period when China will face growing pressure and risks from interntaional competition. Therefore, we must manage the overall social and economic situation with a scientific approach towards development, make better use of the opportunities at this critical time, make great efforts to solve key issues related to the overall social and economic situation, minimize costs and risks for this transmission period, and avoid big fluctuations so that the country will smoothly advance towards its set goals.

Prospects and conditions for development

1. Prospects for economic growth
The 16th Party Congress set the goal to build China into a xiaokang (moderately well-off) society by 2020. That 20-year interval consists of two stages: the first stage covers the 10th and 11th Five-Year Plan periods, and the second covers the rest ten years. The 11th Five-Year Plan period is pivotal for both stages, because during this period China will attempt to maintain the robust economic growth of the previous five-year period, and prolong the surging cycle for a new round of economic growth. The plan is to continue to push industrialization, urbanization and modernization, to readjust the relations of interests, and promote sustainable development in a balanced way – all this for laying a more solid foundation and providing better conditions for achieving the goal of building an affluent society during the second stage of development.
In the next 15 years, cyclic changes are likely to take place in the Chinese economy. Growth rates may fluctuate in such a way that high growth may occur in the first five years, and then give way to a slowdown over the next ten years. It is expected that the 11th Five-Year Plan period will register an average annual GDP growth rate of 7.8%, whereas the figure for the ensuing ten years will stand at 7.2%. With the price in the year 2000 set as the constant price, China’s GDP will approach 19,000 billion Yuan in 2010, and exceed 38,000 billion Yuan in 2020. Calculated at the exchange rate of 2000, it is close to 2,300 billion US dollars in 2010 and to 4,600 billion US dollars by 2020. It is expected that the Chinese population will be 1.35 billion in 2010, and 1.43 billion in 2020. The per-capita GDP will approach 1,700 dollars in 2010 (as compared with the average of 1,920 dollars for a medium-income country today), and exceed 3,200 dollars in 2020, thereby putting China in the ranks of nations with medium- or high-level incomes. An annual growth rate that is higher than 7.2%, which means to quadruple the nation’s 1978 output value, is a highly feasible plan, judging from various conditions. Fifteen years from now, China will have become a xiaokang society at a higher level, and the Chinese people will lead more affluent lives.

2. Favorable conditions for maintaining a quick growth rate

2.1 The giant economy of China has begun to show its advantages with more room for maneuvering.
The robust economic growth over the last 20 or so years has enabled China’s economic aggregation to expand quickly. In 2004, the Chinese GDP reached 1,650 billion dollars, raising China’s share in the world economy from less than 2.4% at the beginning period of the reform and opening to the current 4% - turning the country into one of the few giant economies in the world. The enormous market capacity being created by the 1.3 billion Chinese (500 million urban residents included) en route to a modern lifestyle is unimaginable for any other rising countries. This giant economy will have at least four potential advantages. 1) The market will enjoy so much room for maneuver that surplus commodities from the urban and eastern markets will still sell well in rural areas, particularly in the central and western regions, thereby vastly expanding the life cycle of both commodities and enterprises. 2) It will have a strong capacity to shun or combat risks from the international market and to offset the impact of world market fluctuations. 3) This market is large enough to cultivate world-class giant companies, and can significantly reduce the possibility of a premature collapse in the early-stage development of large companies. 4) It can enhance its market competitiveness so effectively that individual companies find it extremely hard to monopolize the entire market. These advantages not only provide important conditions for China to go on with its sustained quick economic growth, but will also become more outstanding with the expansion of the nation’s economic scale.
2.2  The country will keep its advantage in labor costs for a long time, which is another favorable condition for fast economic growth.
China is perhaps richer than any other country in labor resources. The more than 700 million jobholders and 160 million surplus rural laborers are reasons why China can maintain its relative advantage in labor-intensive industries for a long period to come. The Chinese advantage in labor cost is also attributable to the fact that its highly popularized basic education and fast expanding higher education have guaranteed plentiful supplies of labor resources at all levels. Although the labor price has been rising in the developed eastern regions, the underdeveloped regions are offering broad space for the shift of labor-intensive industries. In this way, the high-speed growth of China can avoid a midway meltdown, which was once experienced by some rising countries when quick labor price increases occurred in the course of an economic takeoff.  Although the sheer magnitude of the labor force poses tremendous pressure on the government to maintain sufficient employment, and its average low quality could withhold the upgrading of the industrial structure, it has also left much leeway for the development of human resources and the investment in labor capital.
2.3 Ample supplies of capital can ensure the demand for funds as needed by the fast economic growth.
The aggregate public savings deposits run as high as 40% in China. It will decrease to a certain extent in the future, with an aging population and increases in consumption rate, but it will still hover at a high level between 30% and 40%. The ever-deepening reform of the financial system will open up smooth channels to convert savings deposits into investment. As investment efficiency improves constantly, there will be an adequate supply of capital for economic growth. China’s ever-improving environment for investment, supplies of human resources, and ability to provide supplementary facilities and services for industries are enough to maintain a strong appeal for foreign investors. China can still draw over 80% of the investment needed from domestic savings deposits, which enables the nation to keep effectively utilizing international resources while avoiding excessive dependence on international capital.
2.4 Further improvements in the industrial system and infrastructure can be a supporting factor for speedy economic growth.
After more than 20 years of sustained fast growth, China has developed a relatively comprehensive industrial setup that is absent in many other developing countries. China’s modern industrial production is characterized by large-scale, high concentration, and high standards of operation. The highly intelligent, flexible and integrated hi-tech intensive production is developing together with large numbers of traditional industries. The Chinese industrial setup encompasses a comprehensive mix of all levels of technology: hi-tech departments (including microelectronics, modern bio-engineering, space and nuclear industries), modern industrial departments (such as petrochemical, iron-and-steel, nonferrous metal, automobile, machine-making, and power industries, and transport and communications) and service departments (such as finance, insurance, trade).. China has markedly improved its infrastructure, thanks to the implementation of an aggressive financial policy and large-scale investment of treasury bonds since the end of the 9th Five-Year Plan period. A more solid material and technical foundation in China today is another important supporting factor for speedy economic growth.
2.5 Speeding up economic restructuring and transformation provides new development space.
To meet the need to upgrade urban and rural residents’ consumption structure and demand for “mass consumption”, new industrial departments such as housing, automobiles, postal and telecommunications will continue to grow at a high rate. The growth cycles of these industries, prolonged by the nation’s huge population and long consumption sequence, mean plenty of new space for economic growth. They catalyze growth in education, culture, tourism, medical service, and other service trades. The growing consumer demand due to accelerated urbanization and the massive shift of rural residents to cities and improvement of lifestyle of urban dwellers, coupled with the demand for investment in infrastructure and real estate rising from the expansion of cities, will become a major driving force behind the nation’s quick growth. The differences in the level and sequence of development between regions and the vastness of the Chinese territory enable China to continue its strategy for regions to develop along different paths.  The time gained from an “echelon formation” timetable allows for the transfer of industries between regions, giving maximum play to these regions’ comparative dynamic advantages and expanding the space needed for quick economic growth.
2.6 The improvement of the socialist market economic system can further emancipate potential for economic growth.
China will keep moving towards the economic restructuring goals for 2020 set at the 16th Party Congress. China will continue to readjust and improve its ownership structure, and to make strategic readjustments of the geographical distribution of the national economy. This means China will concentrate its state-owned enterprises in the industries and economic sectors where their comparative advantages can be best played, and withdraw them from other areas of  competition. China will further make market access easier in those once state-monopolized fields of postal services and telecommunications, electricity, finance, urban public utilities, railways, and civil navigation. Market order will allow for fair competition in non-natural monopoly fields, further enhancing effectiveness of market competition. Reform of the nation’s investment, taxation and financial systems will be promoted (the idea being to reduce the amount of resources that are controlled by the government and distributed through administrative means) in order to expand the market’s resource-allocation space and further improve resource-allocation efficiency. In a word, to deepen reform and improve the system will stimulate the economy’s vitality, improving efficiency of production and economic operation, so as to speed up economic growth.
2.7  China’s strength in utilizing external resources helps alleviate the constraints on China due to the shortages in the supply of certain resources for the nation’s quick economic growth.
By learning from experiences in 20-plus years of opening up to the outside world, China has been able to adapt to the changing external environment in the process of globalization.
2.8 There are favorable conditions for maintaining political and social stability.
China has won both domestic and international recognition for its achievements in the 26 years of reform and opening up to the outside world. Economic growth has yielded more gains for the populace than any time before in Chinese history. It is particularly noteworthy that the ranks of medium-income earners are expanding steadily, and society is becoming increasingly stable. Thus, compared with other countries in the midst of industrialization and social transition, China enjoys more favorable conditions to maintain political and social stability, thereby creating a fine political and social environment for the Chinese economy to maintain its robust growth.

3. Outstanding contradictions and key restraining factors

3.1 The supply of production elements is falling short of the demand needed for quick economic growth, and shortages in human resource capital and in the supply of technology are becoming increasingly acute.
After 26 years of high-speed growth, increases in income and increased costs of production are draining the original advantages for the nation’s fast economic growth – low-cost labor, resources and land use. As a result, traditionally advantageous industries are losing their international competitive edge. During this period, the contribution of such elements as labor, resources and land to the economic growth has been decreasing progressively, while the contribution of technology and human resource capital is rising noticeably. Human resources and innovation ability are obviously falling behind speedy economic growth, so much so that for a period to come, labor quality and, human resource capital, along with self-reliance on the supply of technology - will continue to inhibit China’s fast economic growth.
3.2 Economic restructuring will meet more grave contradictions
Driven by market demands, China’s economic restructuring in recent years has surpassed the past performances in both speed and scale, but it is encountering more acute contradictions in the process. Increases in the general level of industrial technology have brought to light the shortages in domestic technological reserves and in self-reliant technical innovation capabilities. If technical innovation abilities cannot be fundamentally improved, there will be an inadequate supply of technology to keep up with the accelerated industrial technical upgrading for some time in the future – that is to say, the supply of technology will become the bottleneck. Upgrading of industrial infrastructure and the rapid rise of new industries calls for large-scale financing and developing commissioning agencies, but a property protection system and credit systems that are needed for such large-scale financing are lacking. Structural upgrading often comes with mergers, bankruptcies and regroupings that tend to interrupt the corporate fund chains and spell even more nasty financial risks.
3.3 Intensifying contradictions, demands and tight constraints in energy and resource supply will create greater pressure on sustainable development
For a long time in the past, China relied mainly on domestic energy and resources to meet the needs of its high-speed growth. With rapid expansion in economic aggregates and an ever-growing population, people’s changing lifestyle, and in particular, fast development in heavy industry, there has been a rapid rise in energy and resource consumption. The gap between supply and demand is growing, and China is becoming increasingly more dependent on foreign imports. Given the strained global supplies of energy resources, China is not only confronted with rising costs and commercial risks caused by fluctuations in prices, but also faces political and security risks. As a large developing country where industrialization and urbanization trends are accelerating, China will face a long-term tendency toward rapid increases in energy and resource consumption, and the pressure from environmental degradation caused by discharges of waste and calls for sustainable development will also grow.
3.4 There will be more conflicts of interests and social contradictions
As China shifts the focus of its economic growth from quantitative expansion to the raising of quality and efficiency, the combined impacts of increased organic capital structure and the substitution of labor with machinery will aggravate the excessive expansion in the nation’s aggregate volume of labor force and inadequate employment. This trend would be exacerbated if industrial upgrading and development increases before the transition of surplus agricultural population to non-agricultural fields is completed.  As rising industries enjoy more leeway for income increases and market demands, their workers will see pay rises to even higher levels. A considerable number of workers will have to stay in traditional industries due to lack of skills and education, resulting in a striking income gap between these two groups of people. The diversification of interest groups will also result in conflicts between them when it comes to sharing the results of reform and development, and conflicts of interests and friction will increase in the absence of a framework that facilitates equal opportunities for members of different interest groups, coordinates their interests, and protects underprivileged groups. While leading a better material life, people will have high expectations for exercising their democratic rights, protecting their own interests and participating in state affairs. Failing to properly handle these issues will bring hidden contradictions to the surface and cause social unrest and risks.
3.5 Space for population and production elements will become more concentrated, making it tougher to coordinate urban, rural, and regional developments.
Driven by market forces, population and production elements will speed up their gravitation towards cities and developed regions, where the production elements yield high economic returns. This will also aggravate the imbalance between urban and rural areas and between regions in development. If agricultural and rural development cannot be handled properly to bring about a situation in which “agriculture is supplemented with industry and rural development is accelerated with urban support”, it is likely to cause recession in agriculture and dilapidation of villages. Likewise, overheated urban expansion and disorderly development can also result in a shortage of infrastructure and public utilities, congestion, “overpopulation” and worsening environmental problems. This in turn could give rise to a new round of crises in land use, development, and power and water supplies. While the open coastal regions have taken advantage of “globalization” and achieved economic prosperity, the new problem is how to avoid the collapse of some regions, and cultivate a framework under which interests can be shared.
3.6 The degree of economic globalization will be further increased, and there will be greater pressure from international competition and greater external risks for security.
China has emerged as the world’s third largest trading country thanks to sustained growth in foreign trade. A period of slowed trade growth and worsening trade disputes is foreseen. In the meantime, prices of domestic labor, land and other production elements will increase. When  “internationalization of the home market” brings about a relatively full-fledged pattern of competition, foreign-invested enterprises may see a possible drop in their peripheral profits, and the scale of foreign investment is likely to stabilize or even begin to dwindle after it reaches its “critical value”. In particular, the opening of finance, securities and other services fields will increase both the fluidity of capital and the speculative factors on the market. Increases in Chinese shares in the world economy and changes in China’s balance of power with other nations are also likely to prompt competitors to forge a “strategic alliance” to withhold and contain China. Because China is not yet strong enough to counter frictions, containment and other risks, there will be more uncertainties in the external environment.

Ten major strategic options for socioeconomic development during the 11th Five-Year Plan period

1. Changing the mode of economic growth
During the 11th Five-Year Plan period, it is imperative to give prominence to the main task of changing the mode of economic growth and promote the shift of the mode of growth from depending on funds, labor and natural resources to depending on technological innovation and human resources. Economic growth can become more reliant on sci-tech progress and human capital input, and should be based on higher labour quality and technological progress. Thus in strategic choices China must:
1.1 Hasten the flow of resources from departments of low productivity to departments of high productivity, shift production elements from departments with low added value to where the added value is high, readjust and upgrade the industrial structure, and optimize the grouping of production elements;
1.2 Improve the productivity of all production elements, step up human resource development and cultivation of self-reliant innovation capabilities, and raise the rate of contribution of human resources and technological progress to economic growth;
1.3 Improve resource allocation efficiency, uproot the frameworks that encourage extensive growth, raise the effectiveness and adequacy of market competition, break through administrative monopoly and eliminate unreasonable government intervention in enterprises’ economic activities, all of which call for further readjustment of the geographical distribution of the state-owned economy, concentrating it to trades and fields of endeavor with comparative superiorities, and withdrawing it from ordinary competitive fields, loosening up market access to monopoly trades, and keeping the market in order for fair competition; promote reforms of the investment, taxation and financial systems, reduce the amounts of resources to be controlled by the government and distributed through administrative means, expand the scope of resources to be allocated by the market, and further improve resource allocation efficiency;
1.4 Increase resource utility efficiency, develop a cycle economy, promote cycle utilization of resources, encourage enterprises to go in for the cycle mode of production, promote cycle industrial groupings, advocate cycle consumption, and turn waste into resources or innoxious substances and minimize their amounts.

2. Economic restructuring

Economic restructuring in the 11th Five-Year Plan period will serve the purpose of sharpening Chinese industry’s international competitiveness. Its major missions are to:
2.1 Restructure agriculture and the rural economy, step up construction of a modern agriculture, improve agriculture’s comprehensive productive capacity, concentrate farm production in superior production areas, build bases to turn out farm produce with superior quality and competitiveness, step up agriculture-related services for science and technology, finance, marketing, information, and processing, enhance agriculture’s comprehensive economic efficiency, strengthen government support for the agricultural and rural infrastructure, public-interest undertakings and public services, and channel non-state funds to agriculture and rural areas;
2.2 Readjust and upgrade the industrial structure, regroup and transform traditional industries, rejuvenate equipment manufacturing, develop key areas in the electronics and information, bio-engineering, new materials, and other hi-tech and rising industries, address the problem of some industries being “big but not strong”; persist in combining foreign technology imports with self-reliant innovation and turn innovation into a driving force behind industrial technological progress, develop key technologies and famous brand names with China’s owns property rights; upgrade the manufacturing industry from processing or assembling supplied materials or components to the making of precision products and from extensive processing to in-depth processing, raise products’ added value, and turn China from a big manufacturing country into a manufacturing powerhouse; speed up the development and strategic rejuvenation of equipment manufacturing, increase, with the backing of key projects, the guarantee of major technology and equipment for the modernization drive, strive for breakthroughs in our capacities to turn out superior products, major technological equipment, and high-grade, precision and advanced products; raise the efficiency standards for heavy and chemical industries in resource utilization and environmental conservation, raise their threshold entry standards, speed up abolition of outdated production capacities that are highly energy- and resource-consuming and cause serious environmental problems, and set heavy and chemical industries on a road of new-type industrialization;
2.3 Restructure the service industry, give priority to the development of transport and communications, finance and insurance, logistics and other productive services in support of the high-efficiency operation of the national economy, and transform and upgrade traditional services; remove policies and frameworks that are hamstringing the service industry, loosen up entry to the service market, and accommodate more international services to be shifted to China; promote government institutional reform to change the situation in which services can only circle within the system; develop more non-state service companies and increase the vitality and competitiveness of the entire industry.   Industrial restructuring must be integrated with adjustments in the employment structure and local industrial structures. The abundance of labor resources in this country must be brought into full consideration when developing labor-intensive manufacturing and service industries. While striving for hi-tech development, we must also pay due attention to developing applied techniques and skills that keep people in their jobs, and use high technology and advanced applied technology to transform traditional industries, and expand employment capacities in the process of developing traditional industries; we must, by increasing the degree of the processing work, bring forth numerous businesses in the making of machines, equipment, components and related services, so as to extend the industrial chains and increase job opportunities. Regions should proceed from their actual conditions and choose industries that are suitable for local development, and follow distinctively local patterns of industrial development. In the light of the economic characteristics of different industries, we must promote division of professional work and relative regional concentration of related enterprises, and work to cultivate industrial groups and mechanisms for industrial development and for pooling production elements.

3. Developing human resources

During the 11th Five-Year Plan period, China will follow a strategy to develop human resources, improve citizenry quality, and transform its huge population from a burden into a huge human resource.
3.1 It is imperative to foster the concept that humans are the foremost strategic resource, that to tap this resource is to develop the economy itself, and that to invest in this resource is tantamount to accumulating wealth; when we strive for development, we should adjust our guideline by centering on how to tap the human resource and accumulate the wealth contained in it.
3.2 It is important to deepen education reform, expand the supply of education resources, optimize the education structure, raise the education level, build vast contingents of quality industrial workers, new farmers, professionals, engineers and technicians that are exactly what is needed in the modernization drive, cultivate large numbers of professionals to meet the demand of socioeconomic development, and bring forth a team of world-class scientists and engineering experts.
3.3 The nine-year compulsory education should become the norm in China, with more state input and government guarantee; public education resources should be tipped in favor of central and western regions, rural areas and other less developed places; and it is also important to narrow the gap between urban and rural areas and between regions in education development level so as to promote fair and balanced education development.
3.4 Vocational, adult, and continued education should be developed in real earnest; education and training resources must be optimized and consolidated; and an extensive, multi-level education and training network should be set up to produce skilled personnel for the production forefront; and priority should be given to setting up vocational and technical education colleges at the county and township levels to accommodate farmers’ children.
3.5 The strategy of making China strong by cultivating talents must be carried out in all seriousness. A good job must be done in training, attracting and using talented people, with resources for cultivating talent increased, the nation’s talent structure readjusted, a framework created for innovative people to make the most of their talent, and a sound intellectual and talent resource market set up to facilitate the rational flow and optimize allocation of talent.
3.6 It is necessary to build a lifelong education system to raise the moral, scientific and cultural attainments of all citizens, and enhance their senses of responsibility and innovation as well as their scientific and cultural spirit.

4. Raising self-reliant innovation capabilities

During the 11th Five-Year Plan period, the national self-reliant innovation capacity will be increased as the key link in efforts to change the mode of economic growth, restructure the economy, and enhance the nation’s competitiveness; and the transformation of China into an innovative country will be a major strategy for the nation’s future.
4.1 The building of a sound national sci-tech innovation system must be speeded up, the State Outline Program for Medium- and Long-term Scientific and Technological Development should be implemented to the letter, the guiding principle of “relying on ourselves to make innovations and striving for breakthroughs in key areas so as to back development and set the tone for the future” should be closely followed, the effort to improve the nation’s self-reliant innovation capacity must be put in the centre of the entire sci-tech work; scientific and technological resources should be optimized and consolidated, and the construction of national centers for basic research and the basic research of applied sciences must be stepped up. We must move in the direction of science and technology progress, and pool our superiority resources to achieve breakthroughs in areas that may become a major driving force behind national economic development.
4.2 It is necessary to establish a sound technological innovation system in which enterprises play the leading role, and production, study and research are integrated, quicken the shift of scientific and technological resources to enterprises, rely on key enterprises to build industrial technological development centers, strengthen original and integrated innovation, step up the assimilation and renovation of advanced foreign technology, and strive to obtain pivotal technologies for a number of industries, acquire a number of intellectual property rights, and create a group of enterprises and brand names that enjoy an international competitive edge.
4.3 It is necessary to increase government input in strategic high technology, key technologies that have a great bearing on the nation’s core competitiveness and technologies that can be shared by industries, give full play to the role of government purchases in motivating technological innovation in enterprises, and establish a sound framework for the diffusion of technology to push progress in industrial technology.
4.4 It is important to take an active part in international cooperation in science and technology, make good use of international sci-tech resources and combine them with the effort to raise China’s own innovation capacity. It is necessary to create conditions for the effort to change the mode of economic growth and enhance our nation’s competitiveness by constantly improving our self-reliant innovation ability, and to enhance the role of technological progress and innovation in driving economic growth.

5. Promoting coordinated development

During the 11th Five-Year Plan period, we must promote a new type of integrated and diversified urbanization that accords with China’s national conditions.
5.1 Urbanization must be centered on the task of turning rural areas into urban areas and farmers into urban dwellers, and we must furnish conditions for the surplus labor force to find jobs in cities and guide the city-bound rural population flow in a rational and orderly fashion.
5.2  We must maintain order in urban development and persist in intensive urban construction, keep urbanization at a reasonable pace and be mindful of the size of urban development, protect and economize on the use of land, tighten up scientific planning so that cities can be geographically well-distributed and developed in a way to save resources, protect the environment, and show distinctive characteristics.
5.3 We must persist in promoting urbanization in light of local conditions, diversify the mode of urbanization, coordinate development of cities of all sizes, step up the planning, construction and management of large metropolitan clusters while paying due attention to bringing into play the comparative strengths and industrial characters of medium-sized and small cities and guiding intensive development of small cities and towns.
5.4 We must transform the current administrative system that severs urban from rural areas, removes policies and systems that are withholding the integration of urban and rural economies, unify urban and rural markets, especially markets for production elements, promote the organic integration of urban and rural industries, and build a new type of urban-rural relationship that meets the needs of the socialist economic market system and the nation’s actual conditions.
5.5 We should promote the industrialization of farming and the modernization of villages, raise agricultural labor productivity and expand management scales, improve the professional and marketization levels of the rural economy, promote innovation in the land system, taxation reform, and institutional reform at township and county levels, increase input in rural education, public health, infrastructure, and public utilities.
China should promote coordinated development of regional economies and introduce a new pattern for regional development. 1) The task for eastern coastal regions to become the first in China to achieve modernization must be accelerated, and the assembling and diffusing functions of the Yangtze River Delta, the Beijing-Tianjin-Hebei region, and the Pearl River Delta must be strengthened and their international competitiveness increased steadily. 2) It is necessary to persist with large-scale development of the western regions, where industries of distinctive local styles should be cultivated and self-development abilities improved based on infrastructure development and environmental conservation. 3) We must redouble our efforts to rejuvenate old industrial bases in the Northeast and other regions and apply policies that are more forceful and steps in support of these old bases that have run out of resources. 4) The metropolitan clusters of Wuhan, Central China, Changsha-Zhuzhou-Xiangtan should be built up to back the economic takeoff of the central region. 5) Major transregional infrastructure construction should be further promoted, with emphasis on trunk transportation lines between East and West and between central economic development zones, which will give a great impetus to regional economic cooperation. 6) Remote and border regions, minority-inhabited areas, and poverty-stricken areas will be given more support and granted the necessary preferential policies and public resources to improve local infrastructure and public services and gradually raise the welfare level of the local people. 7) It is necessary to step up the building of regional administrative systems and consolidate policies towards regions, explore the ways and means for the building of a regional development system according to their major functions, and improve efficiency in the allocation of resources.

6. Conserving resources in an all-round way
During the 11th Five-Year Plan period it is imperative to carry out a resource-conservation strategy and build a thrift society.

6.1 Building a resource-conserving national economic system, restructuring industries to curtail the industries and products that consume too much energy and resources; barring the import of low-efficiency and outdated technology and products; imposing standards for minimum resource-efficiency and technological-level on the entry of foreign technology and products; and encouraging consumption of resource-saving products.
6.2 Devoting major efforts to saving energy, water, land and resources, losing no time in setting standards for the energy efficiency of products and water-using quotas for key industries, carrying out a system of abolishing products that are too energy-consuming, publishing an outline program for energy and water conservation, supporting the development and application of new technology, new technical processes and new equipment that serve to reduce energy consumption and facilitate multipurpose utilization of resources, doing a good job in energy-and-water-saving transformation of metallurgical, nonferrous metal, petrochemical, building materials and papermaking industries, with the emphasis on reducing energy consumption, oil consumption in particular.
6.3 Introducing a resource-conserving system and mechanism, improving government regulation and control, carrying out incentive policies to intensify energy and resource saving efforts, and increasing financial support for increasing the nation’s resource protecting and conserving abilities.
6.4 Involving public efforts in protecting and conserving resources, encouraging enterprises, intermediary agencies and individuals to participate in the construction of projects aimed at saving energy and raising resource utilization efficiency, and bringing about a market environment and a long-term framework that facilitate the conservation of resources.
6.5 Establishing an energy and resource technology-supporting framework. It is necessary to pool our resources to study and develop major technologies that may impact the way energy and resources develop in the future and to organize the development of efficient energy conservation, resource saving, substitution and reutilization technologies so as to tap the energy-saving potentials to the largest possible extent.
6.6 Vigorously developing a cycle economy, supporting the development and spread of clean production technology, resource saving or substitution technology, recycling technology, and zero discharging technology; establishing models to experiment with the cycle economy; supporting a number of major projects for energy or water conservation, the multipurpose utilization of resources, and the development of the cycle economy; reducing input in the natural resources at the source of production and waste discharges in production processes; and raising the resources’ recycling rate and reutilization level.

7. Renovating the establishment

During the 11th Five-Year Plan period, we must not only realize the reform goal of establishing a relatively complete socialist market economic system by 2010, but also foster a fine legislature for all-round, well-coordinated and sustainable development according to the requirements of the scientific concept of development. On the one hand, we should establish a brand new property-rights system by deepening the reform of state-owned enterprises, cultivate a production element market, promote reform in monopoly fields, and concentrate the state sector in industries and trade to make the most of its relative superiority and withdraw it from ordinary competition fields, so that the property right relationship can become better defined, rights and duties are more clearly divided, production elements can flow more smoothly, and control of market entry can be more relaxed in monopoly industries and trades. We should also reduce the amounts of resources controlled by the government or distributed by administrative means and allow them to be allocated through the market, so as to effectively raise the resource allocation efficiency and further release the tremendous potentials of economic growth. On the other hand, we should give more prominence to reforming the government administrative system, further change government functions and administration, vigorously separate government administration from enterprise management, government from capital, politics from day-to-day work, and government from intermediary organizations. While doing a good job in regulating the economy and supervising the market, more attention should be paid to community management and public services. We must go on with government institutional reform and introduce sound decision-making mechanisms on a scientific and democratic basis, so as to truly turn the government into the supplier of quality public products, the creator of a fine socioeconomic environment, and the guardian of the interests of the broad masses of the people, and to provide the conditions for bringing the role of the market mechanism into full play and for deepening the reform. We must, by transforming investment, taxation, finance, land management and other key systems, set up a unified, open modern market for fair competition, a standard transfer payment system, a sound employment, income distribution and social security system, as well as frameworks for marketing prices of land use, capital, technology, natural resources and other production elements, so as to promote coordinated development between urban and rural areas, between regions, between economy and society, and between man and nature.   
8. Coordinating domestic and international development

During the 11th Five-Year Plan period, we must adapt ourselves to new trends in economic globalization and new home situations in reform and development, adhere to the basic state policy of opening up to the outside world, put our open economic system on a sound footing, coordinate domestic development and the opening-up efforts, and improve our openness in a comprehensive way.
8.1 We must adhere to the strategy of putting economic development under the guidance of domestic demand. To expand domestic demand should become the basic starting point and long-term strategic principle for economic development, so that our open economy will enjoy more leeway for development.
8.2 We should be better able to coordinate the relationship between home economy and world economy, mainly from a strategic, policy and system point of view.
8.3 We should change the mode of increase in foreign trade. We should further carry out a strategy to win competition through quality, optimize our foreign trade structure, increase our exports’ competitiveness, and improve both the quality and efficiency of foreign trade. While making the most of our country’s comparative strengths, we should expand exports of products and services over which we hold intellectual property rights and brand names, increase the export of commodities with high added value, raise the industrial level of the processing trade and beef up our domestic supplementary abilities for it.
8.4 We should improve both the quality and level in which we utilize foreign capital. We must apply a variety of methods that enable transnational corporations to shift to China their processing and manufacturing processes at a higher technological level and greater added value; and we must also establish more management centers, logistics and purchasing centers, research and development centers and regional headquarters whose major task is to bring in advanced technology, management expertise and quality talent, and do a good job in absorbing, assimilating and re-renovating imported technology. We must earnestly undertake international shifts of services, especially projects to be built in foreign countries, international software designing, paging, background financial service, insurance actuarial accounting, taxation, finance, appraisals, as well as information processing.
8.5 We should carry out our “go international” strategy. That is to say, we must further improve our legislation and services for foreign investment, delegate enterprises with more decision-making power in overseas business management, and introduce sound risk prevention mechanisms.
8.6 We will deepen reform of the nation’s foreign-related economic systems – a stable and open foreign-related economic management system, a sound system for monitoring operations in foreign trade, and international revenue and expenditure warming mechanisms – which are designed to safeguard the nation’s fundamental interests and national economic security.
8.7 We should set up a sound framework for handling disputes and frictions in foreign economic relations, explore the ways and means for the establishment of mechanisms to coordinate imports, exports and multilateral or bilateral economic relations, and strengthen self-disciplining and coordination mechanisms in industrial organizations, so that China’s comparative strengths in production element allocation can be brought into further play, and the international competitiveness and risk-countering ability of the Chinese economy can be markedly increased.
9. Building a harmonious society

During the 11th Five-Year Plan period, we should follow the general requirement for the establishment of a harmonious society and strive for real results in handling issues that have a close bearing on the populace’s immediate interests, with particular attention paid to employment, social security, and income distribution. We should also intensify the government’s public service functions, increase fairness and coverage in the allocation of public service resources and promote social harmony.
9.1 Giving top priority to expanding employment in socioeconomic development and promoting simultaneous development of employment and economy. Encouraging the development of labor-intensive industries and services with large job-creating capacities, especially those industries that are both knowledge and labor intensive. Promoting the rational flow of the labor force and raising labor resource allocation efficiency. Developing non-state sectors and widening employment avenues. Encouraging people to take jobs in non-government fields. Further strengthening the government employment service systems.
9.2 Stepping up the effort to put the nation’s social security system on a sound basis. Continuing to deepen the social security system reform, and further improving the urban social security system. Gradually raising the social security standards, and extending social insurance coverage not only to enterprises under different modes of ownership on an equitable basis but also to rural areas. While continuing to rectify and standardize rural social and endowment insurance, we should steadily promote a rural social and endowment insurance system, with developed regions and suburban areas as key areas, and farmers who have lost farmland, farmer-workers in cities, and rural residents who have taken family planning measures as major beneficiaries. We should also im