TAX NEWS - January 2010
2010 - Engaging China's five-year planning cycle
The most appropriate question to ask at this stage, however, is whether the policy-making process now under way offers executives any extraordinary opportunities? Might it be possible, not just to align investment strategy to China's priorities once they have been announced, but to actually partake in the process and help shape the future business environment itself? After a review of recent changes to the planning process, it appears that a trend toward greater openness may indeed offer more opportunities for engagement, although the complexity of the process will require considerable skill at navigation.
As in past years, work on the 12th FYP will be spearheaded by the Strategic Planning Department of National Development and Reform Commission (NDRC), China's lead planning agency. With the research phase of the process under way for over a year, the NDRC announced that drafting had begun in the fall of 2009. The next major milestone, in early 2010, will be approval of high-level areas of policy focus, first by the State Council, China's highest executive authority, and then by the 11th National People's Congress (NPC), China's highest legislative authority, in March, after which more detailed drafting can proceed. By mid-autumn 2010, the NDRC team will send a mature draft for review and approval by Chinese party leadership, with the ultimate goal of presenting the 12th FYP for final approval by the NPC in March 2011. At this stage, the window for engagement likely will close sometime late summer.
China's planning policy process today is much more open compared to just a few years ago. The arrival of Hu Jintao and other "Fourth Generation" leaders on the scene in 2003 - just as planning for the 11th FYP was getting under way - greatly accelerated the evolution of the process from its Soviet command economy origins to a modern tool for economic development and consensus-building. The 11th FYP was a clear expression of the new generation's vision for China, focusing on long-term economic sustainability and placing much greater emphasis on openness and accountability in form. Some changes were largely symbolic - for example, referring to the 11th FYP as a "program" rather than a "plan" to signal an appreciation for limitations of the process - but many others represented significant departures from past practice:
- Expert opinion - Experts from inside and outside government, domestic as well as foreign, were widely consulted on both the substance of the 11th FYP and the planning process itself - more than 150 separate studies were undertaken during 2003-2005.
- Public consultation - Efforts were made to bring Chinese citizens directly into the process, most famously in 2005, when more than four million Chinese were surveyed about their views on environmental protection.
- Monitoring and evaluation - In consultation with multilateral organizations, a mid-cycle review process was introduced, offering the possibility for reflection and course-correction.
- Accountability - The performance evaluation of officials responsible for implementing the 11th FYP would reflect the plan's new sustainability goals, rather than merely rewarding high growth.
The overall effect was to open what had been a very narrow conversation, with the practical effect of sensitizing Chinese policymakers to the perspectives of a greater range of stakeholders.
To get a sense of how the increasing pluralism of the process might expand the number of entry points for foreign investors into the conversation, consider the complex task ahead for the NRDC's Strategic Planning Department in 2010, a team consisting of no more than a few dozen officials among the NDRC's total staff of about 1,000. In addition to incorporating data and other research pouring in from dozens of directions across China, their work must be closely coordinated with the more than 6,000 national, provincial and local bodies engaged in similar planning exercises this year across China. Proposals and recommendations flowing upward must be reviewed and assimilated into the main 12th FYP. As the process unfolds, emerging priorities must then be communicated back so that provincial-level Reform and Development Commissions and lower-level planners can ensure that their plans are consistent and complementary with China's national goals. The NDRC must also ensure that the 12th FYP encompasses the many recent cross-sectoral and regional plans involving different central-level ministries and provincial groupings - i.e. China's National Medium & Long-Term Plan for Science and Technology Development (2006-2020) or Plan for the Reform and Development of the Pearl River Delta (2008-2020). The sheer scale and diversity of input flowing throughout this multi-level process opens a wealth of opportunity for engagement by investors in the year ahead, especially for those who take the time to understand how the Chinese stakeholders with the greatest influence over their investment strategies fit in.
With respect to the challenge of identifying emerging policy priorities for the 12th FYP, especially with the planning process only now gaining steam, generally speaking, a great deal of continuity is expected. Many of the fundamental imbalances targeted by the 11th FYP - income disparities between regions and between urban and rural China, for example - are longterm challenges requiring sustained effort and China itself concedes uneven progress. One source of insight worth consulting is the World Bank's Mid-Term Evaluation of China's 11th Five-Year Plan, prepared at the invitation of the NDRC and released publicly in December 2008. This document praises China, for example, for raising per capita GDP, maintaining a strong fiscal position and extending health insurance coverage. China receives lower marks, however, for its efforts to narrow income gaps, reduce its dependence on investment as an engine of growth, restructure major industries and reduce its carbon footprint. Look for these and other hold-over issues to take center stage during the 12th FYP period, although U.S. executives closely attuned to the process are in line to receive a wealth of intelligence from their own conversations in the meantime.
Getting China right has probably never been as critical to U.S. companies as it is today, making the ability to see around corners invaluable. But by taking a more proactive stance, U.S. executives may be able to achieve more. The increased openness of the process provides an opportunity for U.S. executives to talk to Chinese policymakers, not just about common priorities but about the type of business environment their investments require if they are to enjoy mutual success.
For executives following the dynamics of these conversations and the wider planning process from afar, consider the following questions for your China-based team:
- How does what you are learning affect your operations in China today?
- How does this information sit with the basic assumptions you are making about China over the long-term?