2011 report to congress - U.S.-China Economic and Security Review ...

dkrause on DSKHT7XVN1PROD with $$_JOB91In practice, five-year plans are constantly reviewed and revisedover the course of five years. 327 Reversing years of economic policiesaimed at growth at all costs will not be easy. Critics doubt theChinese government’s ability to overcome entrenched domestic intereststo push through a reform agenda. The 12th Five-Year Plandoes not indicate how the economy will become less reliant on capitalspending, have more liberalized financial markets, or fundamentallyshift China’s global trade balance. According to StephenGreen, regional head of research at the Standard CharteredBank in Shanghai, so far ‘‘[t]here’s absolutely no sign that the percentageof investment in GDP is slowing. And there are no signsof liberalization of the service sector to allow the private sector totake a bigger share of the economy.’’ 328Cornell University economist Eswar Prasad testified before theCommission that one reason that the 12th Five-Year Plan offersfew details related to major structural changes, especially a shiftto a consumption-driven economy, is the inherent tension betweenChina’s short- and long-term objectives. For example, while significantlyraising wages would certainly boost domestic consumption,it would also drive up inflation. 329 Moreover, structural changewould not be to everyone’s benefit. As Dr. Prasad stated, ‘‘For thepolitically well-connected state-owned enterprise bosses, for manyof the bank chairmen, this is actually a very good system becauseit keeps profits flowing into the state enterprises, into thebanks.’’ 330 With the leadership change next year, the CommunistParty may be reluctant to upset the status quo.In meetings with the Commissioners, Hong Kong-based journalistshave noted that there is a contradiction at the heart of China’s12th Five-Year Plan: It aims to create domestic consumption butan active consumer class will mark a shift in power away from thegovernment and state-owned enterprises (SOEs). Michael Pettis,professor of finance with Peking University’s Guanghua School ofManagement, has pointed out that a key characteristic of China’sdevelopment model is financial repression. The vast majority ofhousehold savings takes the form of bank deposits, while the vastmajority of corporate financing takes the form of bank loans. Withthe lending and deposit rates set very low, household savings areused by the state to heavily subsidize the cost of capital. Thisamounts to a transfer from the household sector to favored borrowers.331 Efforts to boost consumption will necessarily cut intohousehold savings thus limiting the amount of the capital availablefor loans to SOEs and other state-supported entities.Industrial Upgrading and Strategic Emerging IndustriesFor the first time, the 12th Five-Year Plan also makes explicitmention of SEIs. According to Dr. Roach, ‘‘the new plan targets amajor move up the manufacturing value chain.’’ 332 It focuses onthe development and expansion of seven SEIs: New-generation informationtechnology, high-end equipment manufacturing, advancedmaterials, alternative-fuel cars, energy conservation andenvironmental protection, alternative energy, and biotechnology.Within these industries, 37 projects have been identified, which arelisted in Addendum III of this section. The goal is to take the SEIsVerDate Nov 24 2008 13:46 Nov 10, 2011 Jkt 067464 PO 00000 Frm 00103 Fmt 6601 Sfmt 6601 G:\GSDD\USCC\2011\067464.XXX 067464