The 2006 National People's Congress

On March 14, China's National People's Congress (NPC), the supreme legislative body closed it annual session in Beijing. This year, the short two week agenda was notable for its launch of the 11th Five Year Program (FYP), indicating the priorities of economic development and public policy for the next five years. Also, pertinent was its expose of a political system in transition.

Lower Growth Rates

In the new plan, fixed asset investment in infrastructure will be curtailed and fiscal transfers are slated for rural areas. The aim is to offer relief to mounting social pressures. With the export sector now constituting 50 percent of the GDP growth, the government seeks to promote domestic consumption and income redistribution, albeit modestly.

Hu and Wen's Roadmap

While different times call for different policies, one motivation for this change of direction can be found in the background of the political leadership. The FYP is a milestone in the consolidation of Hu Jintao's administration. President Hu and Premier Wen Jiabao both spent much of their early careers in the less developed western region. Coupled with Hu's academic and professional background in water conservancy, these are pointers to the new sensitivities and the goal of improving China's environmental performance. While many international media commentators dismissed the NPC as a mere rubber stamp, this description overlooks the subtle evolution of the political processes. The true situation is more nuanced.

Consultation Increases

The Party controls all levels of government and strategic objectives via "macro control" and are dictated from above. Yet, there are increasing signals of tolerance and even promotion of involvement by a broader range of interest groups and civil society at the operational level of public policy formulation. Whereas there was previously a "black box", now there is increased evidence of negotiations between ministries, akin to the interagency process of Washington and the inter-service and inter-institutional debates that characterize Brussels. Greater prominence in the state media is given to the views and pressures of NGOs and "civil society.

Rise of the 'Orderly' Interest Groups

Why is this debate and increased transparency now allowed? The answer lies with the simple pragmatism that has been the hallmark of Chinese attitudes for the past twenty years. A mature, complex economy requires more detailed legislative and regulatory regimes, especially for the services sectors. Accordingly, more complex public policy processes are needed to procure the optimum results.

Future Highlights

The FYP includes a complex tapestry of sector specific plans, but it is worth picking out a few highlights that will act as bell weathers for coming years.

Economic Nationalism: Watch the State Owned Enterprises!

The future role of SOE will have a large influence on the economy and public policy and could upset the delicate balance presently existing between SOE, foreign investors and local private sectors. the CPPCC by Chinese private sector representatives called for "level playing fields", arguing for equal treatment with foreign enterprises in taxation, land supply, and bank credit.

Financial Services

With the opening up this sector under WTO mandate at the end of 2006 there has been a flurry of FDI in the past few years. The minority shareholding and JVs are rights of passage for foreign banks to enter into the Chinese market. 

Environmental Protection and Standards

Chastened by recent high profile environmental accidents, China has embarked on a program to raise standards. Water quality and management are priorities. According to State Council officials, EU legislation provides the benchmark and model. Draft legislation is already proposed for the IT sectors based on Europe's Waste from Electrical and Electronic Equipment (WEEE) and Restrictions of Hazardous Substance (RoHS).

Energy

The push for higher energy efficiency will impact most sectors. A target of reducing energy consumption 20 percent per unit of GDP is ambitious. New energy products are to enter the market. Government policy can be expected to progressively loosen price caps to allow energy prices to rise. Introduction of a tax on motor fuel is under discussion. Confronted by a woeful safety record in the mining sector, the government intends to close over 10,000 small coal mines. Yet, China's dependence on coal is set to continue with coal rising from 75 percent to 80 of the energy mix.

More Foreign Capital, but with More Technology

The IT industry is a useful indicator of public policy trends. In the next 15 years, the government intends to reduce the economy's reliance on foreign technology from over 50 percent to approximately 30 percent.

Cars and Pills

The automotive sector with its proliferation of brands and over capacity is expected to consolidate. Concurrently, the trend of the past years for improved IPR protection will continue. The government objective to move away from bing labeled as the world's low cost manufacturer, up the technology value chain, simply demands effective IPR. With this evolution, expect more investments into the market by "big pharma", the research based pharmaceutical companies.

Conclusion:
Changing Rules of the Game

Overall, this FYP will constitute a change in the maturity and development of the Chinese economy. With focus on the environment we are seeing the tentative adoption of "sustainable development". FDI will continue to be welcomed, but there will be increasing caveats for higher technology. The government's aim is maintenance of stability while promoting the emergence of Chinese brands and companies capable of investing and competing internationally. If you thought the 10th FYP was an exciting time in China, then the next five years will be just as exciting, but somewhat different. Changing times and changing conditions require changing rules of the game.

For full detail article by John Russell, Executive VP Asia Pacific of Weber Shandwick, please click on this link to visit China Matters newsletter by Powell Tate I Weber Shandwick.

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