China’s five-year plan: A user guide for business success in the Central Kingdom
April 15, 2015
*This article first appeared in Inside Counsel Magazine
China is now entering the final year of its 12th Five Year Plan. For over six decades, the Chinese central government has been endorsing these five-year plans as a means of establishing national priorities for society and the economy. Thus, these plans provide valuable direction for firms hoping to conduct business with – or within – the People’s Republic of China. The overarching goal of the current plan is to sustain the tremendous growth the Chinese economy has experienced over the past thirty years.
The Chinese government began endorsing five-year plans for economic and social development in 1953. The First Five Year Plan (1953-1957) focused on industrial growth coupled with central planning, state ownership in most sectors, and large, multi-family cooperatives tasked with collectively developing agriculture. The key goals at that time were the development of iron and steel manufacturing, coal mining, cement production, and machine building.
The Second Five Year Plan (1958-1962), a.k.a., the Great Leap Forward, attempted to greatly increase industrial and agricultural output simultaneously. But things did not work out as hoped. Steel made in “back-yard” smelting plants, as well the machinery being churned out from new factories, soon began falling apart. This failed rush to rapid industrialization, along with the transfer of so many workers from agriculture to industry, contributed to the three years of the Great Chinese Famine.
China has learned a lot since these early attempts at reform, however, and the objectives of its more recent five-year plans are not unlike those of any other modern nation that is grappling with pollution, the depletion of scarce resources and increasing wealth disparity. National goals are now much more realistic, and the results have often exceed expectations. For example, the 11th Five-Year Plan (2006-2010) called for 7.5 percent annual growth in GDP, but the actual increase was closer to 11 percent.
The 12th Five-Year Plan (2011-2015)
The priorities of the current five-year plan are higher quality growth, increased domestic consumption, and the development of modern industries (which includes new energy sources, biotechnology, automobiles, and IT infrastructure). Because these industries are provided more support – and enjoy comparatively less oversight – they operate in an environment that is more conducive to innovation and expansion. But it is in these areas that competition is fiercest.
Potential players in such favored industries need to rapidly maximize their commercial capabilities and form relationships of trust with local governments. These are the emerging battlegrounds where many companies are striving to achieve positions of leadership and technological dominance. And China is obviously nurturing its own champions of industry by helping them gain the modern technologies and commercial capabilities they need to expand.
The goal is for these newer industries to produce 15 percent of China’s GDP by 2020. And while wind and solar power will continue to receive special treatment under China’s “green” development efforts, the biggest beneficiaries under the latest five-year plan are likely those companies that are most sensitive to changes in domestic consumption like food, consumer goods and services, pharmaceuticals, and travel. This is because the current plan seeks to boost overall domestic spending.
At the same time, the most recent five-year plan seeks to boost household income by about 7 percent. This could be good news for companies that may now be able to penetrate into new markets with their products and services, like the countryside and newly urbanized areas. But the target of increasing the minimum wage by 13 percent year-after-year may could put companies in domestic construction, retail, or manufacturing between a rock and a hard place.
Such a rapid increase in labor costs generally induces inflation, but this is something the Chinese government has made clear it wants to avoid. If businesses are effectively forced to absorb these rising costs, rather than pass them on to consumers, they may have to reduce the size of their workforce. Upward pressure on prices is also coming from rising fuel and material costs, as well as increased costs associated with complying with new quality and safety regulations.
Most importantly, the price of real of estate is going through the roof in China just like it is everywhere else, and this is having an enormous impact on the overall cost of doing business. If the Chinese real estate industry is not able stabilize itself, the government may increase its regulatory role. The current plan targeted the creation of 36 million “affordable” units, but this is proving to be an impossible goal as China is dealing with the same speculative bubbles that are plaguing the United States and Europe.
China’s economic landscape is evolving quickly, especially as the current plan comes to a close and the commencement of the new plan draws near (the 13th Five-Year Plan is set to begin in March, 2016). Thus, the government must quickly develop new standards in order to keep up with this rapid change, including the establishment of tighter banking rules, broader environmental protection policies, stricter food and drug safety regulations, and stronger consumer protection laws.
But because the rules of the game are constantly in flux, foreign firms are finding it increasingly difficult to comply with ever-changing industry standards, market entry criteria and partnership models. Therefore, businesses must remain agile as they learn how to interpret China’s new policies. And the best way to do this is by working closely with counsel that has strong local connections, and that has first-hand knowledge of China’s business and legal environment
By doing so, your company will be able to create a five-year plan of its own – a plan for sustainable profitability in China!
About the Author
Jeffrey C.P. Wang is the managing partner and founder of WHGC, P.L.C. Mr. Wang’s practice focuses on handling the legal concerns of international and domestic corporations. In addition to his J.D., Mr. Wang has two advanced Masters of Law Degrees from the University of Washington and the Southern Methodist University School of Law. [email protected]